9% year-to-date loan growth pushes total loans past the $10 billion milestone
Dividends declared on common and preferred shares
EDMONTON, Sept. 1 /CNW/ - Canadian Western Bank (TSX: CWB) today announced very strong financial performance marking the Bank's 89th consecutive profitable quarter. Third quarter net income increased 62% to $46.6 million compared to the same quarter last year while diluted earnings per common share increased 55% to $0.59. Record earnings included recognition of a $7.5 million reduction to income tax expense and a related $1.2 million before tax interest receipt from certain prior period transactions that together increased quarterly net income by approximately $8.3 million ($0.11 per diluted common share). Net income before income taxes increased 34% compared to the same quarter last year on record total revenues, on a taxable equivalent basis (teb - see definition following Financial Highlights table), driven by a 65 basis point improvement in net interest margin (teb) and 11% growth in total loans. On a year-to-date basis, net earnings of $124.5 million, or $1.57 per diluted common share, increased 64% and 45%, respectively, reflecting the combined positive impact of a 68 basis point improvement in net interest margin (teb), a 20% increase in other income, 9% loan growth and a lower effective tax rate.
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Third Quarter Highlights:
(three months ended July 31, 2010 compared with three months ended
July 31, 2009 unless otherwise noted)
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- Record net income of $46.6 million, up 62%; net income before income
taxes of $53.2 million, up 34%.
- Diluted earnings per common share of $0.59, up 55%.
- Record quarterly total revenues (teb) of $111.0 million, up 30%.
- Net interest margin (teb) of 2.78%, up 65 basis points.
- Tier 1 capital ratio of 11.4% and total capital ratio of 14.4%,
compared to 11.2% and 15.4% respectively a year earlier.
- Return on common shareholders' equity of 19.1%, up 570 basis points.
- Total loans surpassed the $10 billion milestone to reach
$10.1 billion.
- Third consecutive quarter of record net income for Canadian Direct
Insurance.
On September 1, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on September 30, 2010 to shareholders of record on September 16, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on October 31, 2010 to shareholders of record on October 21, 2010.
Record banking and trust segment net income of $43.0 million was a 69% increase compared to the same quarter last year and included the previously noted income tax recovery. Net income before income taxes in this segment was $48.4 million, up 37% over a year earlier. A significant improvement in net interest margin, including the favourable margin impact from the acquisition of National Leasing Group Inc., loan growth and a 7% increase in other income helped push banking and trust segment total revenues (teb) up 32% to $103.1 million. Quarterly net income from insurance operations was a record $3.6 million, up from $3.2 million compared to a year earlier reflecting continued business growth.
"Our exceptional financial performance through an uncertain operating environment confirms the ongoing success and resiliency of CWB's business model," said Larry Pollock, President and CEO. "We have already surpassed last year's record annual earnings by a considerable margin. While we are optimistic about the economic outlook for our markets, particularly over the long-term, lingering recessionary impacts are still apparent, most notably in Alberta. Our pipeline for new loans remains in line with expectations and we plan to continue our long history of double-digit loan growth. We are also seeing some further positive signs on the credit front, as evidenced by the decline in the dollar level of our gross impaired loans this quarter."
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Financial Highlights
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For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except July 31 April 30 July 31 July 31
per share amounts) 2010 2010 2009 2009
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Results of Operations
Net interest income
(teb - see below) $ 85,020 $ 80,132 $ 60,934 40%
Less teb adjustment 2,782 2,662 2,189 27
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Net interest income
per financial
statements 82,238 77,470 58,745 40
Other income 26,025 30,840 24,604 6
Total revenues (teb) 111,045 110,972 85,538 30
Total revenues 108,263 108,310 83,349 30
Net income 46,595 37,884 28,729 62
Earnings per common
share
Basic(1) 0.64 0.52 0.39 64
Diluted(2) 0.59 0.47 0.38 55
Diluted cash(3) 0.60 0.48 0.38 58
Return on common
shareholders'
equity(4) 19.1% 16.3% 13.4% 570 bp(5)
Return on assets(6) 1.40 1.17 0.87 53
Efficiency ratio(7)
(teb) 44.4 45.0 47.0 (260)
Efficiency ratio 45.5 46.1 48.2 (270)
Net interest margin
(teb)(8) 2.78 2.76 2.13 65
Net interest margin 2.69 2.67 2.05 64
Provision for credit
losses as a
percentage of
average loans 0.23 0.23 0.15 8
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Per Common Share
Cash dividends $ 0.11 $ 0.11 $ 0.11 -%
Book value 13.65 13.08 11.87 15
Closing market value 25.97 23.99 18.19 43
Common shares
outstanding
(thousands) 66,547 66,309 63,738 4
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Balance Sheet and
Off-Balance Sheet
Summary
Assets $12,110,173 $12,004,281 $11,331,377 7%
Loans 10,104,866 9,866,669 9,137,763 11
Deposits 10,257,042 10,185,043 9,393,809 9
Subordinated
debentures 315,000 315,000 375,000 (16)
Shareholders'
equity 1,118,115 1,077,111 966,232 16
Assets under
administration 8,311,799 8,223,274 4,751,886 75
Assets under
management 757,899 779,721 835,613 (9)
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Capital Adequacy(9)
Tangible common
equity to risk-
weighted assets(10) 8.5% 8.4% 7.9% 60
Tier 1 ratio 11.4 11.4 11.2 20
Total ratio 14.4 14.5 15.4 (100)
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For the nine months ended
(unaudited) -------------------------- Change from
($ thousands, except July 31 July 31 July 31
per share amounts) 2010 2009 2009
------------------------------------------------------------
Results of Operations
Net interest income
(teb - see below) $ 239,458 $ 168,342 42%
Less teb adjustment 8,007 5,450 47
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Net interest income
per financial
statements 231,451 162,892 42
Other income 83,231 69,525 20
Total revenues (teb) 322,689 237,867 36
Total revenues 314,682 232,417 35
Net income 124,514 75,928 64
Earnings per common
share
Basic(1) 1.73 1.10 57
Diluted(2) 1.57 1.08 45
Diluted cash(3) 1.60 1.09 47
Return on common
shareholders'
equity(4) 17.8% 13.0% 480 bp(5)
Return on assets(6) 1.28 0.84 44
Efficiency ratio(7)
(teb) 43.2 49.0 (580)
Efficiency ratio 44.3 50.2 (590)
Net interest margin
(teb)(8) 2.70 2.02 68
Net interest margin 2.61 1.95 66
Provision for credit
losses as a
percentage of
average loans 0.21 0.15 6
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Per Common Share
Cash dividends $ 0.33 $ 0.33 -%
Book value 13.65 11.87 15
Closing market value 25.97 18.19 43
Common shares
outstanding
(thousands) 66,547 63,738 4
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Balance Sheet and
Off-Balance Sheet
Summary
Assets
Loans
Deposits
Subordinated
debentures
Shareholders'
equity
Assets under
administration
Assets under
management
------------------------------------------------------------
Capital Adequacy(9)
Tangible common
equity to risk-
weighted assets(10)
Tier 1 ratio
Total ratio
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(1) Basic earnings per share is calculated as net income less preferred
share dividends divided by the average number of common shares
outstanding.
(2) Diluted earnings per share is calculated as net income less
preferred share dividends divided by the average number of common
shares outstanding adjusted for the dilutive effects of stock
options and warrants.
(3) Diluted cash earnings per share is diluted earnings per common share
excluding the after-tax amortization of acquisition-related
intangible assets.
(4) Return on common shareholders' equity is calculated as annualized
net income after preferred share dividends divided by average common
shareholders' equity.
(5) bp - basis point change.
(6) Return on assets is calculated as annualized net income after
preferred share dividends divided by average total assets.
(7) Efficiency ratio is calculated as non-interest expenses divided by
total revenues.
(8) Net interest margin is calculated as annualized net interest income
divided by average total assets.
(9) Capital adequacy is calculated in accordance with guidelines issued
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).
(10) Tangible common equity to risk-weighted assets is calculated as
shareholders' equity less subsidiary goodwill divided by risk-
weighted assets, calculated in accordance with guidelines issued by
OSFI.
Taxable Equivalent Basis (teb)
Most banks analyze revenues on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, diluted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, provision for credit losses as a percentage of average loans and tangible common equity to risk-weighted assets do not have standardized meanings prescribed by generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures presented by other financial institutions.
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Message to Shareholders
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Canadian Western Bank (CWB or the Bank) is pleased to report very strong financial performance for its 89th consecutive profitable quarter, a period spanning more than 22 years. Third quarter highlights included the achievement of record total revenues (teb - see definition following Financial Highlights table) and 2% quarterly loan growth which helped total loans surpass the $10 billion milestone.
Record quarterly net income of $46.6 million was up 62% ($17.9 million) compared to a year earlier and included recognition of a $7.5 million income tax recovery and related $1.2 million before tax interest receipt from certain transactions in fiscal 2005 that together increased quarterly net income by approximately $8.3 million ($0.11 per diluted common share). Diluted earnings per common share increased 55% ($0.21) to $0.59. Excluding the impact of the income tax recovery and related interest receipt, net income and diluted earnings per common share increased 33% ($9.6 million) and 26% ($0.10) respectively. The quarterly net interest margin increased significantly over the third quarter last year and was the primary factor influencing before tax earnings growth. Record total revenues (teb) of $111.0 million represent a 30% ($25.5 million) increase reflecting the improvement in margin, the positive impact of loan growth and 6% higher other income. Our acquisition of National Leasing Group Inc. (NL or National Leasing), effective February 1, 2010, had a further positive impact on the Bank's overall financial performance.
Compared to the prior quarter, net income before income taxes increased 1% ($0.3 million) as three additional revenue earning days, loan growth and a slightly improved net interest margin offset a 16% ($4.8 million) decrease in other income which was mainly attributed to $3.2 million lower gains on sale of securities. On a year-to-date basis, net income of $124.5 million was up 64% ($48.6 million) compared to the same period last year while diluted earnings per common share increased 45% ($0.49) to $1.57. Exceptional year-to-date earnings growth was largely the result of the significant year-over-year improvement in net interest margin.
The Bank's Tier 1 and total capital ratios at July 31, 2010 remained very strong at 11.4% and 14.4%, respectively. Return on common shareholders' equity of 19.1% was up 570 basis points compared to the same quarter last year and 280 basis points from the prior quarter. Quarterly return on assets of 1.40% represented a 53 basis point improvement from a year earlier and was up 23 basis points compared to last quarter. The third quarter reduction of income tax expense positively impacted quarterly return on common shareholders' equity and return on assets by 360 basis points and 27 basis points, respectively. Compared to the third quarter last year, profitability ratios benefited from the recovery of net interest margin and loan growth, partially offset by higher non-interest expenses and the provision for credit losses related to NL.
Dividends
On September 1, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on September 30, 2010 to shareholders of record on September 16, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on October 31, 2010 to shareholders of record on October 21, 2010.
Loan Growth
Total loans grew 2% ($238 million) in the quarter, 9% ($869 million) year-to-date and 11% ($967 million) over the last twelve months. Organic loan growth improved compared to prior quarters despite ongoing recession related challenges across almost all lending sectors. Partially due to comparatively faster repayments, the achievement of sustained growth remains particularly challenging in the heavy equipment financing and real estate construction portfolios. The overall volume in the pipeline for new loans is in line with expectations in view of continued global economic uncertainties. Consequently, we expect to achieve or surpass our 2010 loan growth target of 10%.
Credit Quality
Overall credit quality remained satisfactory and within expectations given the current point in the credit cycle. The dollar level of gross impaired loans was $150.0 million at quarter end, compared to $167.2 million last quarter as impaired accounts that were paid down or resolved exceeded new formations. Based on our present view of credit quality, it is expected that the dollar level of gross impaired loans will continue to fluctuate but loan losses are expected to remain within acceptable levels. The quarterly provision for credit losses of $5.8 million represented 23 basis points of average loans. Excluding the impact of National Leasing, the provision for credit losses remained within our initial 2010 target range of 15 to 20 basis points. On a consolidated basis, we now expect the provision for credit losses for fiscal 2010 to represent 20 to 25 basis points of average loans.
Branch Deposit Growth
Deposits raised through our branch network and trust companies were up 1% in the quarter, 3% year-to-date and 15% compared to a year earlier. The demand and notice component within branch-raised deposits, which include lower cost deposits, was relatively unchanged from last quarter but grew 12% year-to-date and 33% over the past year. Growth compared to the prior year largely reflects the ongoing success of Canadian Western Trust Company in generating deposits through its fiduciary business. Implementing additional strategies to enhance our competitive position and support net interest margin through diversifying the funding base, including lower cost demand deposits, remains a priority.
Net Interest Margin
Net interest margin (teb) of 2.78% recovered significantly over the third quarter last year mainly reflecting lower deposit costs, more favourable yields on fixed rate loans, a shift in the deposit mix and lower liquidity levels. Compared to the prior quarter, net interest margin (teb) increased two basis points. The year-to-date net interest margin (teb) of 2.70% is more typical of spreads achieved prior to the global financial crisis and also includes the positive impact of considerably higher yields earned on National Leasing's fixed rate assets. Increased competition and other factors suggest that a material improvement in margin over that achieved in the third quarter is unlikely. There were two increases in the prime lending interest rate during the third quarter. Based on our current interest rate sensitivity, further increases in the prime rate are expected to positively impact net interest income.
Outlook
CWB recorded very strong third quarter results and year-to-date earnings have surpassed the record annual net income achieved in fiscal 2009 by a significant margin. While there are still uncertainties, including those related to the strength of the economic recovery, we expect to meet or surpass our 2010 loan growth target of 10%. Growth targets for total revenues and profitability are well ahead of the Bank's minimum performance benchmarks. The 2010 efficiency ratio should also be very favourable compared to the target established last year. We remain very confident about the benefits of our proven business plan and core geographic position in Western Canada and believe this favourable position will become more apparent once the economic recovery firms up. Two new full-service banking branches will open next quarter and bring our total branch count to 39. National Leasing has already established itself as a key component of the CWB Group and is expected to materially benefit both earnings growth and diversification moving forward. Canadian Direct Insurance Incorporated and Canadian Western Trust Company are also on track to achieve record results this year. We will maintain our disciplined underwriting practices, solid balance sheet and strong capital base to ensure the Bank remains well positioned to take advantage of opportunities and manage any unforeseen challenges moving forward.
We look forward to reporting our fiscal 2010 fourth quarter and annual results on December 7, 2010.
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Q3 Results Conference Call
CWB's third quarter results conference call is scheduled for Thursday,
September 2, 2010 at 8:00 a.m. ET (6:00 a.m. MT). The Bank's executives
will comment on financial results and respond to questions from analysts
and institutional investors.
The conference call may be accessed on a listen-only basis by dialing
647-427-7450 or toll-free 1-888-231-8191. The call will also be webcast
live on the Bank's website, www.cwbankgroup.com.
A replay of the conference call will be available until September 16,
2010 by dialing 416-849-0833 (Toronto) or 1-800-642-1687 (toll-free) and
entering passcode 89346886.
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About Canadian Western Bank Group
Canadian Western Bank offers a full range of business and personal banking services across the four western provinces and is the largest Canadian owned bank headquartered in Western Canada. The Bank, along with its operating subsidiaries, Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Incorporated, National Leasing Group Inc., Adroit Investment Management Ltd. and Canadian Western Financial Ltd., collectively offer a diversified range of financial services across Canada and are together known as the Canadian Western Bank Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol 'CWB'. The Bank's Series 3 preferred shares and common share purchase warrants trade on the Toronto Stock Exchange under the trading symbols 'CWB.PR.A' and 'CWB.WT' respectively. Refer to www.cwbankgroup.com for additional information.
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Management's Discussion and Analysis
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This management's discussion and analysis (MD&A) should be read in conjunction with Canadian Western Bank's (CWB or the Bank) unaudited interim consolidated financial statements for the period ended July 31, 2010, as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009, available on SEDAR at www.sedar.com and the Bank's website at www.cwbankgroup.com. Except where indicated below, the factors discussed and referred to in the MD&A for fiscal 2009 remain substantially unchanged.
Overview
CWB recorded very strong third quarter results reflecting record financial performance from both business segments. Consolidated net income increased 62% ($17.9 million) over the same quarter last year to $46.6 million. Third quarter diluted earnings per common share was $0.59 ($0.64 basic), up 55%. Record results included recognition of a $7.5 million income tax recovery and related $1.2 million before tax interest receipt from certain transactions in 2005 that together increased quarterly net income by approximately $8.3 million ($0.11 per diluted common share).
Banking and trust segment net income of $43.0 million increased 69% ($17.6 million) compared to the third quarter last year and included the tax recovery noted above. Banking and trust segment net income excluding income taxes was $48.4 million, up 37% ($13.1 million). Record total revenues, on a taxable equivalent basis (teb - see definition following Financial Highlights table), attributed to a significant improvement in net interest margin, 11% ($967 million) loan growth and 7% ($1.2 million) growth in other income more than offset the earnings impact of 24% ($9.0 million) higher non-interest expenses and a $2.4 million increase in the quarterly provision for credit losses. Banking and trust segment performance includes the acquisition of National Leasing Group Inc. (NL or National Leasing), effective on February 1, 2010 (refer to Note 15 of the unaudited interim consolidated financial statements for further details on the acquisition). Comparatively higher yields earned on NL's portfolio positively impact net interest margin, but the benefit of increased net interest income is partially offset by a higher provision for credit losses, measured as a percentage of average loans, compared to the Bank's core commercial lending business. The insurance segment posted record quarterly net income of $3.6 million, up $0.3 million from a year earlier. Strong insurance results mainly reflect increased net earned premiums due to continued business growth and a positive contribution from the Alberta auto risk sharing pools, partially offset by higher claims and policy acquisition costs.
Compared to the previous quarter, consolidated net income before income taxes increased 1% ($0.3 million) as three additional revenue earning days, loan growth and a slightly improved net interest margin offset a 16% ($4.8 million) decrease in other income mainly attributed to $3.2 million lower gains on sale of securities. Quarterly diluted earnings per common share was up 26% ($0.12) reflecting the factors already noted, including the significant third quarter tax benefit. Consolidated year-to-date net income of $124.5 million was up 64% ($48.6 million) compared to the same period in 2009, while diluted earnings per common share increased 45% to $1.57. The significant year-to-date improvement reflects comparatively strong results across almost all metrics, most notably net interest margin. Lower percentage growth for diluted earnings per common share compared to net income mainly reflects the dilution from CWB's outstanding warrants and 2.1 million CWB common shares issued as partial consideration for the acquisition of NL.
Third quarter return on common shareholders' equity was 19.1%, a significant increase from 13.4% a year earlier. The quarterly return on assets was 1.40%, up from 0.87% last year. The impact of the income tax recovery on third quarter return on common shareholders' equity and return on assets was 360 basis points and 27 basis points, respectively. On a year-to-date basis, return on common shareholders' equity was 17.8%, up from 13.0% in 2009. Return on assets through the first nine months was 1.28%, compared to 0.84% last year. Compared to the same period in 2009, higher profitability ratios were mainly driven by very strong growth in net interest income because of improved net interest margin, loan growth, strong other income and the income tax recovery, partially offset by increased non-interest expenses and the impact of CWB's preferred unit offerings completed in March 2009.
Total Revenues (teb)
Total revenues (teb), comprising both net interest income and other income, reached a record $111.0 million for the quarter, up 30% ($25.5 million) compared to a year earlier. Quarterly total revenues reflect the positive impact of a significant improvement in net interest margin and a 6% ($1.4 million) increase in other income. Compared to last quarter, net interest income increased $4.9 million reflecting three additional revenue earning days and a slightly improved net interest margin, largely offset by a $4.8 million reduction in other income due to lower gains on sale of securities. On a year-to-date basis, total revenues of $322.7 million increased 36% ($84.8 million) over the same period last year. Margin improvement and loan growth led to a $71.1 million increase in year-to-date net interest income while other income was up 20% ($13.7 million).
Net Interest Income (teb)
Quarterly net interest income of $85.0 million was up 40% ($24.1 million) compared to the same period last year driven by a 65 basis point improvement in net interest margin to 2.78% and 11% loan growth. The improvement in net interest margin compared to the same quarter in 2009 reflects lower deposit costs, more favourable yields on fixed rate loans, a shift in the deposit mix and lower liquidity levels. More favourable yields on fixed rate loans largely reflect the positive impact from NL. In view of the current asset composition, interest rate environment, continued competitive influences and the positive impact from NL, management believes the net interest margin should stabilize around the current level.
Net interest income was up 6% ($4.9 million) compared to the previous quarter reflecting three additional days and loan growth. Net interest margin increased slightly compared to last quarter. On a year-to-date basis, net interest income increased 42% ($71.1 million) reflecting a 68 basis point improvement in net interest margin that was mainly due to the factors already noted.
Note 12 to the unaudited interim consolidated financial statements summarizes the Bank's exposure to interest rate risk as at July 31, 2010. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income over the time periods shown resulting from a one-percentage point change in interest rates. The July 31, 2010 estimates are based on a number of assumptions and factors, which include:
- a constant structure in the interest sensitive asset and liability
portfolios;
- floor levels for various deposit liabilities;
- prime rate decreases limited to 0.75% due to the historically low
levels of interest rates;
- interest rate changes affecting interest sensitive assets and
liabilities by proportionally the same amount and applied at the
appropriate re-pricing dates; and,
- no early redemptions.
July 31 April 30 July 31
($ thousands) 2010 2010 2009(1)
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Impact of 1% increase in interest rates
1 year $ 4,442 $ 1,132 $ 9,493
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1 year percentage change 1.5% 0.4% 3.8%
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Impact of 1% decrease in interest rates
1 year $ (4,331) $ 5,364 $ 13,058
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1 year percentage change (1.4)% 1.9% 5.2%
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(1) Methodology for the calculation of interest sensitivity at July 31,
2009 does not include a minimum interest rate level for certain
deposit accounts that were included in the 2010 calculations.
As at July 31, 2010, it is estimated that a one-percentage point increase in interest rates would increase net interest income by approximately 1.5% over the following twelve months; this compares to July 31, 2009 when it was estimated that a one-percentage point increase in interest rates would have increased net interest income by approximately 3.8% over the following twelve months. During 2009, in order to more effectively manage interest rate sensitivity against falling interest rates, many prime-based loans were negotiated with a floor rate. Should the prime rate decrease below these levels, the rate on these loans would remain fixed. However, as the prime rate increases, the rate on these loans only begins to go up once the floor rate is passed. In modeling the effects of a one-percentage point increase in interest rates, not all loans would increase by the full one-percentage point, whereas it is assumed that all liabilities increase by the full amount.
It is estimated that a one-percentage point decrease in interest rates as at July 31, 2010, would decrease net interest income by approximately 1.4% over the following twelve months; this compares to July 31, 2009 when it was estimated that a one-percentage point decrease in interest rates would have increased net interest income by approximately 5.2% over the following twelve months. When modeling a one-percentage point decrease for the most recent period, the rates on most prime-based loans with a negotiated floor rate do not decrease, whereas the remainder of prime-based loans decrease by only 0.75%.
Based on the interest rate gap position at July 31, 2010, it is estimated that a one-percentage point increase in all interest rates would decrease other comprehensive income by $9.2 million, net of tax (April 30, 2010 - $12.1 million); it is estimated that a one-percentage point decrease in all interest rates at July 31, 2010 would increase other comprehensive income by a similar amount.
It is management's intention to continue to manage the asset liability structure and interest rate sensitivity within the Bank's established policies through pricing and product initiatives, as well as through the use of interest rate swaps or other appropriate hedging techniques.
Other Income
Third quarter other income of $26.0 million increased 6% ($1.4 million) from a year earlier as growth across nearly all categories more than offset the impact of a $5.6 million reduction in gains on sale of securities to $0.8 million. Based on general market expectations and the current composition of the securities portfolio, management believes gains on sale of securities as a source of other income will remain relatively low compared to the very high levels achieved in prior periods, including the first two quarters of 2010. The 'other' category within other income was up $2.5 million including $1.2 million of interest income attributed to the third quarter tax recovery and a favourable $0.6 million net change in fair value on NL's interest rate swaps and retained interests on securitized assets. Credit related fee income was up 32% ($2.0 million). Trust and wealth management services revenues and retail services fee income increased 20% ($0.7 million) and 26% ($0.5 million), respectively. Quarterly net insurance revenues increased 6% ($0.3 million) reflecting growth in net earned premiums.
Compared to the previous quarter, other income was down 16% ($4.8 million) as the positive impact of $0.6 million higher net insurance revenues and three additional revenue earning days was more than offset by declines in the remaining categories of other income, including $3.2 million lower gains on sale of securities and a $0.8 million reduction in the 'other' category of other income. Other income year-to-date of $83.2 million increased 20% ($13.7 million) as strong results across CWB's core operations, including contributions from the second quarter acquisition of NL, more than offset a $9.7 million decline in gains on sale of securities.
Credit Quality
Overall credit quality remained satisfactory and within current expectations. While the dollar level of gross impaired loans decreased compared to last quarter, the overall loan portfolio continues to be impacted by global economic factors, particularly as they relate to demand for commodities. Management believes that Western Canada is positioned to benefit significantly once there is a sustained period of global economic growth.
For the three months ended
-------------------------------------- Change from
(unaudited) July 31 April 30 July 31 July 31
($ thousands) 2010 2010 2009 2009
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Gross impaired loans,
beginning of period $ 167,229 $ 146,402 $ 107,017 56%
New formations 30,899 55,586 25,111 23
Reductions, impaired
accounts paid down
or returned to
performing status (41,519) (26,229) (22,444) 84
Write-offs (6,633) (8,530) (4,455) 48
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Total(3) $ 149,976 $ 167,229 $ 105,229 43%
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Balance of the ten
largest impaired
accounts $ 86,737 $ 97,037 $ 54,990 58%
Total number of
accounts classified
as impaired(4) 210 211 211 -
Total number of
accounts classified
as impaired under
$1 million(4) 185 182 195 (5)
Gross impaired loans
as a percentage of
total loans(1) 1.47% 1.68% 1.14% 33 bp(2)
(1) Total loans do not include an allocation for credit losses or
deferred revenue and premiums.
(2) bp - basis point change.
(3) Gross impaired loans includes foreclosed assets held for sale with a
carrying value of $2,081 (April 30, 2010 - $695 and July 31, 2009 -
$4,756).
(4) Total number of accounts excludes National Leasing accounts.
Gross impaired loans at July 31, 2010 were $150.0 million, compared to $167.2 million last quarter and $105.2 million a year earlier. The ten largest accounts classified as impaired, measured by dollars outstanding, represented approximately 58% of the total gross impaired loans at quarter end, unchanged compared to the prior quarter 58% and up from 52% a year earlier.
Gross impaired loans represented 1.47% of total loans at quarter end, compared to 1.68% last quarter and 1.14% one year ago. Based on its current view of credit quality, management believes the dollar level of gross impaired will continue to fluctuate until economic conditions stabilize further. The dollar level of gross impaired loans goes up and down as loans become impaired and are subsequently resolved and does not directly reflect the dollar value of expected write-offs given the tangible security held against the Bank's lending positions. The Bank establishes its current estimates of expected write-offs through detailed analyses of both the overall quality and ultimate marketability of the security held against impaired accounts. Actual credit losses are expected to remain within acceptable levels as the credit cycle continues to progress toward expansion.
The fiscal 2010 target range for the provision for credit losses of 15 to 20 basis points of average loans does not consider the impact of NL. Compared to the Bank's lending portfolio, the nature of NL's business leads to a higher provision for credit losses measured as a percentage of loans. The third quarter provision for credit losses was 23 basis points of average loans, compared to 16 basis points excluding NL. With the acquisition, the actual provision for credit losses in fiscal 2010 is expected to be in the range of 20 to 25 basis points of average loans.
The Bank's long-standing strategy with respect to managing the allowance for credit losses has been to maintain a consistent provision to cover both identified and unidentified losses. The purpose of the general allowance for credit losses is to mitigate the timing impact of unidentified losses in the portfolio and management expects that the level of the general allowance will fluctuate as specific losses are recognized and subsequently written-off. Based on results from ongoing stress testing of the portfolio under various credit scenarios, the adequacy of the general allowance for credit losses is deemed sufficient in consideration of management's current expectations for credit quality and the secured nature of the existing loan portfolio.
The total allowance for credit losses (general and specific) represented 51% of gross impaired loans at quarter end, compared to 46% last quarter and 71% one year ago. The total allowance for credit losses was $75.7 million at July 31, 2010, compared to $76.4 million last quarter and $74.2 million a year earlier. The general allowance as a percentage of risk-weighted loans was 67 basis points, up from 66 basis points last quarter and down from 73 basis points one year ago.
Non-interest Expenses
Effective execution of CWB's strategic plan, which is focused on profitable growth over the long-term, will continue to require increased spending in certain areas. Significant expenditures relate to additional staff complement as well as expanded premises and technology upgrades. Spending in these areas is an integral part of the Bank's commitment to maximize shareholder value over the long-term and is expected to provide material benefits in future periods. In support of management's objective to enhance the Bank's market presence, two additional full-service banking branches are expected to open in the next quarter.
Third quarter non-interest expenses of $49.3 million were up 23% ($9.1 million) compared to last year. Total salary and benefit costs increased $5.8 million, other expenses were $1.9 million higher and premises and equipment expenses were up $1.5 million. NL comprised $6.7 million of the total increase in consolidated non-interest expenses, including $1.0 million of additional amortization of intangibles. Within non-interest expenses and excluding the impact of NL, salary and benefit costs were up 7% ($1.8 million) with the increase attributed to increased staff complement and annual salary increments.
Compared to the prior quarter, non-interest expenses were down 1% ($0.7 million). Year-to-date non-interest expenses were 20% ($22.9 million) higher than the same period in 2009. Excluding NL, year-to-date non-interest expenses increased 9% ($10.5 million) as higher salary and benefit costs reflecting increased staff complement and annual salary increments more than offset lower stock compensation expense this year. Other changes are consistent with the factors already discussed.
The third quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb), was 44.4%, compared to 47.0% last year and 45.0% in the previous quarter. The improvement compared to 2009 reflects the combined positive impact on total revenues from a strong recovery in net interest margin, increased other income and loan growth. Considering planned expenditures, management expects to be well within its 2010 target for the efficiency ratio of 48% or better.
Income Taxes
The third quarter income tax rate (teb) was 16.6%, down from 31.4% one year ago, while the tax rate before the teb adjustment was 12.2%, compared to 27.6% last year. The quarterly provision includes a reduction to income taxes of $7.5 million related to the confirmation from taxation authorities of certain transactions that occurred in 2005; the effective tax rate (teb) excluding the tax recovery would have been 30.0%.
The income tax rate (teb) for the first nine months of 2010 was 25.9%, down 560 basis points from the same period one year ago, while the tax rate before the teb adjustment was 22.2%, or 580 basis points lower. The decrease in the income tax rate (teb) from last year reflects a 440 basis point impact from the previously mentioned income tax recovery, as well as a 100 basis point decrease in the basic federal income tax rate effective July 31, 2009 and a 50 basis point decrease in British Columbia's provincial tax rate effective January 1, 2010.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes, and totaled $56.3 million for the third quarter, compared to $39.3 million in the same period last year. The increase in comprehensive income reflects a 62% ($17.9 million) improvement in net income. Year-to-date comprehensive income totaled $120.6 million, compared to $102.2 million last year. The increase reflects a 64% ($48.6 million) improvement in net income, partially offset by lower unrealized gains on available-for-sale securities. The change in OCI reflects market value fluctuations related to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve, as well as gains reclassified to other income.
Balance Sheet
Total assets increased 1% ($106 million) in the quarter and 7% ($779 million) in the past year to reach $12,110 million at July 31, 2010.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled $1,697 million at July 31, 2010, compared to $1,827 million last quarter and $1,997 million one year ago (refer to the Treasury Management section of this MD&A for additional details). The unrealized gain recorded on the balance sheet at July 31, 2010 was $21.2 million, compared to $7.6 million last quarter and $25.6 million a year earlier. The considerable change in unrealized gains compared to the prior quarter is largely attributed to a fluctuation in market value of the Bank's preferred share portfolio; unrealized gains in this portfolio totaled $11.9 million as at July 31, 2010, compared to unrealized losses of $0.8 million last quarter. The securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common shares that are not held for trading purposes and, where applicable, are typically held until maturity. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve. CWB has no direct credit exposure to sovereign debt outside of Canada.
Realized gains on sale of securities in the third quarter were $0.8 million, compared to $4.1 million in the previous quarter and $6.4 million a year earlier. On a year-to-date basis, gains on sale of securities of $11.4 million were down 46% ($9.7 million) compared to the same period last year. Gains on sale of securities in prior periods mainly resulted from investment strategies and unusual market conditions that allowed the Bank to capitalize on opportunities to realize gains while maintaining relatively comparable yields on reinvestment in other high quality investment grade securities. Looking forward, the quarterly dollar amount of gains on sale of securities is expected to be closer to levels achieved in the current quarter.
Treasury Management
Until recently, high liquidity levels were maintained in response to disruptions and related uncertainties in financial markets. Many of these uncertainties have subsided and the Bank has now reduced liquidity to more normal levels. This reduction in liquidity levels has a positive impact on net interest margin. Barring significant adverse changes in the economic and market environments, liquidity is expected to be managed closer to current levels going forward.
In addition to the Consultative Document described in the Capital Management section of this MD&A, the Bank for International Settlements (BIS) issued a companion Consultative Document entitled International Framework for Liquidity Risk Measurement, Standards and Reporting. Although the framework was primarily aimed at internationally active banks, CWB participated along with the other large Canadian banks by providing OSFI information to assist in assessing the impact of the proposals. The new proposals, which were updated via a news release issued on July 26, 2010, could lead to higher liquidity and funding costs for internationally active banks. The BIS has indicated that they expect some of the new measures to be rolled out over a longer time horizon than originally anticipated to allow affected banks sufficient time to adjust to the changes. It is not yet known how the liquidity standards will apply to Canadian banks with predominantly domestic business. Regulators have indicated they will issue the final requirements and related transition plan before the end of the calendar year.
Loans
Total loans of $10,105 million grew 2% ($238 million) in the quarter, 9% ($869 million) year-to-date and 11% ($967 million) in the past twelve months. At the effective acquisition date of February 1, 2010, NL added $323 million of on-balance sheet loans. Measured by geographic concentration, all provinces showed positive loan growth in the quarter. While overall loan growth continued to be constrained by ongoing economic uncertainty, particularly in Alberta, management is optimistic about the volume in the pipeline for new lending activity. All lending sectors also showed relatively good quarterly growth with the exception of heavy equipment financing and the real estate lending portfolio. Energy loans and personal loans and mortgages were up notably compared to last quarter but these sectors represent a relatively small percentage of the total portfolio. The achievement of sustained growth in the Bank's heavy equipment financing business remains challenging reflecting both economic factors and this portfolio's relatively short duration. Management believes the return of sustained growth in this portfolio will be a good leading indicator of a more robust economic recovery in core geographic markets. Management also continues to believe that Western Canada's resource-based economies are poised for a comparatively stronger recovery than the rest of Canada once overall global activity expands. Looking forward, loan growth is expected to remain constrained until economic factors improve further. Despite continued challenges and a tentative outlook, management expects CWB will achieve or surpass the fiscal 2010 loan growth target of 10%.
Loans in the Bank's alternative mortgage business, Optimum Mortgage (Optimum), increased 11% in the quarter, 33% year-to-date and 51% over the past twelve months to reach $745 million. Optimum commenced offering higher ratio insured mortgages in the latter part of fiscal 2009 to expand its broker distribution and this initiative has provided the primary source of loan growth over the past year. Uninsured mortgages are secured via conventional residential first mortgages carrying a weighted average underwritten loan-to-value ratio at initiation of approximately 70% and currently represent approximately 60% of Optimum's total portfolio. A large majority of all uninsured mortgages within Optimum carry a fixed interest rate with the principal amortized over 25 years or less. Management remains committed to further developing this business as it continues to produce strong returns while maintaining an acceptable risk profile.
Deposits
Total branch deposits, including those raised by trust services, were up 15% ($808 million) compared to a year earlier and 1% ($68 million) from the previous quarter. The demand and notice component within branch deposits was up 33% ($871 million) compared to the same time last year and was relatively unchanged from last quarter. Growth in demand and notice deposits compared to a year earlier largely reflects Canadian Western Trust Company's ongoing success in generating new trust deposits through growth of its fiduciary business. The significant growth in demand and notice deposits supports management's objective to further enhance and diversify the Bank's funding sources and can also benefit net interest margin. Valiant Trust Company was approved as a federal deposit-taking institution this year and management is developing strategies to utilize this additional channel to raise deposits and increase net interest income.
Total deposits at quarter end were $10,257 million, up 1% ($72 million) from the previous quarter and 9% ($863 million) over the past year. Total branch deposits measured as a percentage of total deposits were 61% at July 31, 2010, unchanged from the previous quarter and up from 58% a year earlier. Compared to July 31, 2009, the increase in branch deposits as a percentage of total deposits reflects the combined impact of very strong growth in the demand and notice component. Demand and notice deposits represented 34% of total deposits at quarter end, unchanged from the previous quarter and up from 28% a year earlier.
Other Assets and Other Liabilities
Other assets at July 31, 2010 totaled $308 million, compared to $311 million last quarter and $196 million one year ago. The change in other assets compared to a year earlier mainly reflects the acquisition of NL (refer to Note 15 of the unaudited interim consolidated financial statements for further details on the acquisition), including increases in goodwill and other intangible assets, net of taxes, of $27.9 million and $30.1 million, respectively. Other liabilities at quarter end were $420 million, compared to $427 million the previous quarter and $596 million last year. Other liabilities in the same period last year included $247 million of securities sold under repurchase agreements, compared to nil in the current quarter.
Off-Balance Sheet
Off-balance sheet items include assets under administration and assets under management. Total assets under administration, including both trust assets and leases under administration, totaled $8,312 million at July 31, 2010, compared to $8,223 million last quarter and $4,752 million one year ago. Assets under management held within Adroit Investment Management Ltd. were $758 million at quarter end, compared to $780 million last quarter and $836 million one year ago. The gross amount of securitized assets at quarter end was $232 million, compared to $276 million last quarter. Other off-balance sheet items are comprised of standard industry credit instruments (guarantees, standby letters of credit and commitments to extend credit), and the non-consolidated variable interest entity. CWB does not utilize, nor does it have exposure to, collateralized debt obligations or credit default swaps. For additional information regarding other off-balance sheet items refer to Notes 14 and 20 to the audited consolidated financial statements on pages 82 and 88 respectively in the Bank's 2009 Annual Report.
Capital Management
At July 31, 2010, CWB's total capital adequacy ratio, which measures regulatory capital as a percentage of risk-weighted assets, was 14.4%, down from 14.5% last quarter and 15.4% one year ago. The Tier 1 ratio was unchanged from last quarter at 11.4%, compared to 11.2% at the same time last year. Current minimums for the total and Tier 1 capital adequacy ratios of Canadian Banks as set by the Office of the Superintendent of Financial Institutions Canada (OSFI) are 10% and 7%, respectively.
Compared to one year ago, the Bank's Tier 1 regulatory capital increased with the retention of earnings, net of dividends, and the issuance of additional CWB common shares (primarily 2.1 million shares issued as partial consideration for NL), partially offset by goodwill attached to the acquisition of National Leasing, a capital deduction relating to its securitized assets and warrant purchases made under the Bank's outstanding Normal Course Issuer Bid (refer to Note 8 of the unaudited interim consolidated financial statements for further details). Total regulatory capital was impacted by the foregoing factors, as well as the redemption of $60.0 million of subordinated debentures on November 20, 2009 and an increased deduction for the investment in CWB's insurance subsidiary. Further details regarding changes in CWB's regulatory capital and capital adequacy ratios compared to prior periods are included in the following table:
As at As at As at Change from
(unaudited) July 31 April 30 July 31 July 31
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Regulatory Capital
Tier 1 Capital
before deductions $ 1,208,374 $ 1,176,975 $ 1,050,137 $ 158,237
Less: Goodwill (37,438) (37,191) (9,360) (28,078)
Securitization
(National
Leasing) (11,012) (11,176) - (11,012)
-------------------------------------------------------------------------
Tier 1 Capital 1,159,924 1,128,608 1,040,777 119,147
-------------------------------------------------------------------------
Tier 2 Capital
before deductions 387,948 380,080 445,312 (57,364)
Less: Investment
in insurance
subsidiary (66,945) (63,431) (53,919) (13,026)
Securitization
(National
Leasing) (11,012) (11,176) - (11,012)
-------------------------------------------------------------------------
Total Tier 2 Capital 309,991 305,473 391,393 (81,402)
-------------------------------------------------------------------------
Total Regulatory
Capital $ 1,469,915 $ 1,434,081 $ 1,432,170 $ 37,745
-------------------------------------------------------------------------
Risk Weighted Assets $10,217,053 $ 9,882,832 $ 9,299,282 $ 917,771
-------------------------------------------------------------------------
Tier 1 capital
adequacy ratio 11.4% 11.4% 11.2% 20 bp(1)
Total capital
adequacy ratio 14.4 14.5 15.4 (100)
(1) bp - basis point change.
CWB expects to remain very well capitalized. The retention of earnings should more than support capital requirements associated with ongoing regulatory uncertainty and expected organic asset growth. The Bank's strong capital ratios provide considerable flexibility and management continues to evaluate opportunities to deploy capital for the long-term benefit of CWB shareholders.
In December 2009, the Basel Committee on Banking Supervision of the BIS (the Committee) issued a Consultative Document entitled Strengthening the Resilience of the Banking Sector, which was subsequently updated via a news release issued on July 26, 2010. While the Committee remains deeply committed to its stated objectives for both capital adequacy and liquidity reform, after review of the information gathered through the public consultation process and results of the Quantitative Impact Study undertaken by the members, the Committee reached a broad agreement to ease some of the proposed guidelines. The global regulators are expected to outline the final requirements and transition plan before the end of the calendar year. CWB has a very strong capital position and expects implementation of the final set of standards should be relatively straightforward to manage given the lack of complexity in the Bank's current composition of regulatory capital.
Further information relating to the Bank's capital position is provided in Note 14 of the unaudited interim consolidated financial statements as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2009.
Book value per common share at July 31, 2010 was $13.65 compared to $13.08 last quarter and $11.87 one year ago.
Common shareholders received a quarterly cash dividend of $0.11 per common share on July 2, 2010. On September 1, 2010, CWB's Board of Directors declared a cash dividend of $0.11 per common share, payable on September 30, 2010 to shareholders of record on September 16, 2010. This quarterly dividend is unchanged from both the previous quarter and one year ago. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred Share payable on October 31, 2010 to shareholders of record on October 21, 2010.
Acquisitions
On February 1, 2010, the Bank acquired 100% of the common shares of National Leasing for a total cost of $126.6 million. Consideration for the acquisition included $52.8 million cash, 2,065,088 common shares of CWB ($42.6 million) and contingent consideration. Both the Bank and the vendors have the option to trigger payment of the contingent consideration no earlier than November 1, 2012. The future value of the contingent consideration is not yet determinable and the difference will be recognized as an adjustment to goodwill in the period in which the contingency is resolved. Refer to Note 15 of the unaudited interim consolidated financial statements for further details on the acquisition.
Changes in Accounting Policies
There were no new significant accounting policies adopted during the quarter for purposes of presenting the Bank's financial statements under Canadian generally accepted accounting principles (GAAP).
Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities to International Financial Reporting Standards (IFRS). The Bank's consolidated financial statements will be prepared in accordance with IFRS for the fiscal year commencing November 1, 2011 and will include comparative information for the prior year, including an opening balance sheet as at November 1, 2010.
The Bank has a four stage project underway to identify and evaluate the impact of the transition to IFRS on the consolidated financial statements and develop a plan to complete the transition. The project plan includes the following phases - diagnostic, design and planning, solution development, and implementation. The diagnostic and the design and planning phases are complete, and the potential IFRS differences relative to the Bank's current accounting policies have been documented. The solution development phase will be substantially complete by the end of fiscal 2010. Further information on the Bank's transition plan is provided on pages 56 to 58 of the 2009 Annual Report.
Based on the analysis completed to date, the most significant accounting policy differences on initial transition for the Bank due to adopting IFRS have been identified as the following:
- Loan loss accounting - Although both existing Canadian GAAP and IFRS
calculate loan losses using the incurred loss model, IFRS is more
specific as to what qualifies as an "incurred event." Under IFRS,
incurred losses require objective evidence of impairment, must have a
reliably measurable effect on the present value of estimated cash
flows and be supported by currently observable data. This difference
is not expected to impact the calculation of the specific allowance
for credit losses but may impact the calculation of the general (or
collective) allowance. The Bank is developing an appropriate IFRS
methodology but it is not yet determinable whether any adjustments
will be required on transition.
- Derecognition - Under existing IFRS rules, NL's securitized assets
(totaling $232 million at July 31, 2010) would be reported on the
balance sheet. However, recent proposals, if adopted, would
grandfather all securitized pools existing at transition date so NL's
existing securitized assets would remain off-balance sheet.
- Consolidation - Canadian Western Bank Capital Trust will be
consolidated under IFRS. For more information about this entity see
Note 14 on page 82 of the October 31, 2009 audited consolidated
financial statements.
IFRS 1 - First Time Adoption of IFRS provides a framework for the transition to IFRS. Generally, retroactive application is applied to the opening balance sheet for the comparative 2010 year financial statements as though the Bank had always applied IFRS. However, IFRS 1 permits both mandatory and optional exemptions from full retroactive application. We are currently evaluating all optional exemptions under IFRS 1, with the most significant potential exemption relating to business combinations. IFRS 1 permits the application of the IFRS requirements to business acquisitions completed after the initial transition to IFRS or retroactively from a date of the Bank's choosing.
CWB continues to monitor the International Accounting Standards Board's proposed changes to standards during Canada's transition to IFRS. These proposed changes may have a significant impact on the Bank's implementation plan and future financial statements.
Controls and Procedures
There were no changes in the Bank's internal controls over financial reporting that occurred during the quarter ended July 31, 2010 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
The Bank's certifying officers have limited the scope of the design of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) to exclude the controls, policies and procedures of National Leasing, acquired in the second quarter of 2010. The limitation will be removed no later than January 31, 2011.
Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of Canadian Western Bank.
Updated Share Information
As at August 27, 2010, there were 66,551,297 common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 3,998,072 common shares for maximum proceeds of $79.4 million and 14,205,684 warrants that are each exercisable until March 3, 2014 to purchase one common share in the Bank at a price of $14.00.
Dividend Reinvestment Plan
The Bank's common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.A) are deemed eligible to participate in CWB's dividend reinvestment plan (the "Plan"). The Plan provides holders of the Bank's eligible shares the opportunity to direct cash dividends toward the purchase of common shares. Further details for the Plan are available on the Bank's website at http://www.cwbankgroup.com/investor_relations/drip.htm. At the current time, for the purposes of the Plan, the Bank has elected to issue common shares from treasury at a 2% discount from the average market price (as defined in the Plan).
Normal Course Issuer Bid
On January 18, 2010, CWB received approval from the Toronto Stock Exchange to initiate a Normal Course Issuer Bid (NCIB) and purchase, for cancellation, up to 748,058 of its warrants. The NCIB commenced January 20, 2010 and will expire January 19, 2011. From January 20 to July 31, 2010, the Bank purchased and cancelled 746,504 warrants at an average purchase price per warrant of $10.92; the aggregate amount of the warrant purchases was charged to retained earnings. A copy of the NCIB news release is available on the Bank's website and on SEDAR at www.sedar.com.
Summary of Quarterly Financial Information
2010 2009
------------------------------------------------------------- -----------
($ thousands) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Total revenues (teb) $ 111,045 $ 110,972 $ 100,672 $ 90,099
Total revenues 108,263 108,310 98,109 87,702
Net income 46,595 37,884 40,035 30,357
Earnings per common share
Basic 0.64 0.52 0.57 0.42
Diluted 0.59 0.47 0.52 0.39
Diluted cash 0.60 0.48 0.52 0.39
Total assets ($ millions) 12,110 12,004 11,642 11,636
-------------------------------------------------------------------------
2009 2008
------------------------------------------------------------- -----------
($ thousands) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Total revenues (teb) $ 85,538 $ 75,382 $ 76,947 $ 74,059
Total revenues 83,349 73,707 75,361 72,519
Net income 28,729 21,580 25,619 24,485
Earnings per common share
Basic 0.39 0.30 0.40 0.39
Diluted 0.38 0.30 0.40 0.38
Diluted cash 0.38 0.30 0.41 0.38
Total assets ($ millions) 11,331 11,450 10,907 10,601
-------------------------------------------------------------------------
The financial results for each of the last eight quarters are summarized above. In general, CWB's performance reflects a relatively consistent trend although the second quarter contains three fewer revenue earning days.
The Bank's quarterly financial results are subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are primarily reflected in other income (refer to Results by Business Segment - Insurance), are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes. Mandatory participation in the Alberta auto risk sharing pools can also result in unpredictable quarterly fluctuations. Quarterly results can also fluctuate due to the recognition of periodic income tax items, as was the case in the current quarter where an income tax recovery and related interest receipt from certain prior period transactions increased net income by approximately $8.3 million.
During the fourth quarter of 2008 and throughout fiscal 2009 the Bank's quarterly net interest income was negatively impacted by compression of the net interest margin that mainly resulted from consecutive reductions in the prime lending interest rate, coupled with significantly higher deposit costs and other spin-off effects of the global financial crisis. Gains on sale of securities, reflected in other income, were unusually high during the same period also mainly due to factors associated with the financial crisis, including a steep interest rate curve and wide credit spreads that allowed the Bank to capitalize on specific investment strategies. In the first quarter of fiscal 2010, net interest margin recovered to more typical levels achieved before the onset of the global financial crisis.
The acquisition of National Leasing was effective February 1, 2010 and the results of its operations and financial position are consolidated as part of the Bank's overall financial performance beginning with the second quarter of 2010 (refer to Results by Business Segment - Banking and trust). The acquisition had a positive impact on all categories in the table above.
For details on variations between the prior quarters, refer to the summary of quarterly results section of the Bank's MD&A for the year ended October 31, 2009 and the individual quarterly reports to shareholders which are available on SEDAR at www.sedar.com and on CWB's website at www.cwbankgroup.com. The 2009 Annual Report and audited consolidated financial statements for the year ended October 31, 2009 are available on both SEDAR and the Bank's website.
Results by Business Segment
CWB operates in two business segments: 1) banking and trust, and 2) insurance. Segmented information is also provided in Note 13 of the unaudited interim consolidated financial statements.
Banking and trust
Operations of the banking and trust segment comprise all commercial and retail banking services including equipment leasing offered by National Leasing, acquired on February 1, 2010. The banking and trust segment also includes trust, wealth management and other financial services provided through Canadian Western Trust Company, Valiant Trust Company and Adroit Investment Management Ltd.
Net income of $43.0 million increased 69% ($17.6 million) compared to the same quarter last year and included the impact of the previously described tax recovery and related interest receipt that increased quarterly net income by approximately $8.3 million. Earnings before income taxes (teb) increased 37% ($13.6 million) as a significant 66 basis point improvement in net interest margin (teb), 11% loan growth and 7% ($1.2 million) growth in other income more than offset the impact of 24% ($9.0 million) higher non-interest expenses and a $2.4 million increase in the provision for credit losses. The change in net interest margin mainly resulted from lower deposit costs, more favourable yields on fixed rate loans including the positive impact of NL, a more favourable deposit mix and lower liquidity levels. Combined growth in credit related fee income, other income contributions from NL and additional categories within other income more than offset a $5.4 million decline in gains on sale of securities. The 'other' category within other income included the $1.2 million interest receipt related to the income tax recovery, a $0.6 million positive net change in fair value on NL's interest rate swaps and retained interests in securitized assets, and lease administration income. The increase in non-interest expenses and the provision for credit losses is largely attributed to the addition of NL. The quarterly efficiency ratio (teb), which measures non-interest expense as a percentage of total revenues (teb), was 44.9%, compared to 47.8% last year.
Compared to the prior quarter, earnings before income taxes (teb) were up $0.2 million as higher net interest income from three additional days, loan growth and a slightly improved net interest margin offset $5.1 million lower other income that included expected reductions in gains on sale of securities and securitization revenues of $2.9 million and $0.7 million, respectively.
On a year-to-date basis, net income increased 64% ($44.5 million) mainly driven by a 69 basis point improvement in net interest margin (teb). Net interest income (teb) was up 43% ($70.5 million) over the same period in 2009 while other income increased 15% ($8.4 million). The positive earnings impact of record total revenues was partially offset by increased non-interest expenses and a higher provision for credit losses. The year-to-date efficiency ratio (teb) was 43.7%, an improvement of 550 basis points.
For the three months ended
-------------------------------------- Change from
July 31 April 30 July 31 July 31
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Net interest income
(teb) $ 83,235 $ 78,436 $ 59,340 40%
Other income 19,865 24,951 18,651 7
-------------------------------------------------------------------------
Total revenues (teb) 103,100 103,387 77,991 32
Provision for credit
losses 5,806 5,487 3,369 72
Non-interest expenses 46,305 47,129 37,283 24
Provision for income
taxes (teb) 7,890 16,245 11,809 (33)
Non-controlling
interest in
subsidiary 59 41 50 18
-------------------------------------------------------------------------
Net income $ 43,040 $ 34,485 $ 25,480 69%
-------------------------------------------------------------------------
Efficiency ratio (teb) 44.9% 45.6% 47.8% (290) bp
Efficiency ratio 46.0 46.7 49.1 (310)
Net interest margin
(teb) 2.77 2.75 2.11 66
Net interest margin 2.68 2.67 2.04 64
Average loans
(millions)(1) $ 9,962 $ 9,714 $ 9,028 10%
Average assets
(millions)(1) 11,935 11,688 11,142 7
-------------------------------------------------------------------------
For the nine months ended
-------------------------- Change from
July 31 July 31 July 31
($ thousands) 2010 2009 2009
------------------------------------------------------------
Net interest income
(teb) $ 234,290 $ 163,840 43%
Other income 65,432 56,994 15
------------------------------------------------------------
Total revenues (teb) 299,722 220,834 36
Provision for credit
losses 15,006 10,107 48
Non-interest expenses 131,061 108,574 21
Provision for income
taxes (teb) 39,264 32,273 22
Non-controlling
interest in
subsidiary 176 173 2
------------------------------------------------------------
Net income $ 114,215 $ 69,707 64%
------------------------------------------------------------
Efficiency ratio (teb) 43.7% 49.2% (550) bp
Efficiency ratio 44.8 50.3 (550)
Net interest margin
(teb) 2.69 2.00 69
Net interest margin 2.60 1.94 66
Average loans
(millions)(1) $ 9,643 $ 8,955 8%
Average assets
(millions)(1) 11,647 10,959 6
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
(1) Assets and loans are disclosed on an average daily balance basis.
Insurance
The insurance segment is comprised of the operations of Canadian Direct Insurance Incorporated (Canadian Direct or CDI), which provides auto and home insurance to individuals in British Columbia and Alberta.
Canadian Direct reported record quarterly net income of $3.6 million representing a $0.3 million increase from a year ago. The strong results were driven by a 7% increase in net earned premiums, partially offset by higher claims and policy acquisition costs. Growth in net earned premiums reflects a 6% increase in policies outstanding and higher average premiums per policy in the home product lines of business. Increased claims costs included $1.3 million (net of reinsurance) attributed to a severe July hail storm in Alberta. Results also included a positive $0.8 million before tax contribution from Canadian Direct's share of the Alberta auto risk sharing pools (the Pools). The Pools' results reflect a favourable adjustment to claims reserves due to revised actuarial assumptions.
Net income was up $0.2 million compared to the previous quarter on the strength of an 8% improvement in net earned premiums. Net earned premiums increased across all product lines reflecting policy growth and three additional days this quarter. Revenue growth more than offset the earnings impact of higher claims experience resulting from the Alberta hail storm. The Pools' before tax contribution of $0.8 million was $0.6 million higher than the previous quarter.
Year-to-date net income of $10.3 million represented a 66% ($4.1 million) increase from the same period last year. Absent the impact of the Pools, the year-over-year increase in net income was 39% ($2.3 million) reflecting 8% growth in net earned premiums and an improvement in net claims expense.
On July 29, 2010, the Alberta Insurance Rate Board mandated that all insurers implement a 5% rate reduction on basic coverage on private passenger vehicles in Alberta. The order will go into effect November 1, 2010 and will have a negative impact on revenues for the Alberta auto line of business.
For the three months ended
-------------------------------------- Change from
July 31 April 30 July 31 July 31
($ thousands) 2010 2010 2009 2009
-------------------------------------------------------------------------
Net interest income
(teb) $ 1,785 $ 1,696 $ 1,594 12%
-------------------------------------------------------------------------
Other income (net)
Net earned premiums 28,858 26,627 26,895 7
Commissions and
processing fees 606 546 741 (18)
Net claims and
adjustment expenses (17,023) (15,784) (16,660) 2
Policy acquisition
costs (6,307) (5,868) (5,181) 22
-------------------------------------------------------------------------
Insurance revenues
(net) 6,134 5,521 5,795 6
Gains on sale of
securities 26 368 158 (84)
-------------------------------------------------------------------------
Total revenues (net)
(teb) 7,945 7,585 7,547 5
Non-interest expenses 2,995 2,831 2,927 2
Provision for income
taxes (teb) 1,395 1,355 1,371 2
-------------------------------------------------------------------------
Net income $ 3,555 $ 3,399 $ 3,249 9%
-------------------------------------------------------------------------
Policies outstanding
(No.) 182,961 180,289 172,979 6
Gross written
premiums $ 35,701 $ 30,531 $ 33,067 8
Claims loss ratio(1) 59% 59% 62% (300) bp
Expense ratio(2) 30 31 27 300
Combined ratio(3) 89 90 89 -
Alberta auto risk
sharing pools
impact on net income
before tax $ 784 $ 221 $ 557 41%
Average total assets
(millions) 216 210 200 8
-------------------------------------------------------------------------
For the nine months ended
-------------------------- Change from
July 31 July 31 July 31
($ thousands) 2010 2009 2009
------------------------------------------------------------
Net interest income
(teb) $ 5,168 $ 4,502 15%
------------------------------------------------------------
Other income (net)
Net earned premiums 82,816 76,990 8
Commissions and
processing fees 1,770 2,155 (18)
Net claims and
adjustment expenses (49,797) (51,437) (3)
Policy acquisition
costs (17,464) (15,603) 12
------------------------------------------------------------
Insurance revenues
(net) 17,325 12,105 43
Gains on sale of
securities 474 426 11
------------------------------------------------------------
Total revenues (net)
(teb) 22,967 17,033 35
Non-interest expenses 8,447 8,035 5
Provision for income
taxes (teb) 4,221 2,777 52
------------------------------------------------------------
Net income $ 10,299 $ 6,221 66%
------------------------------------------------------------
Policies outstanding
(No.) 182,961 172,979 6
Gross written
premiums $ 90,564 $ 85,290 6
Claims loss ratio(1) 60% 67% (700) bp
Expense ratio(2) 29 28 100
Combined ratio(3) 89 95 (600)
Alberta auto risk
sharing pools
impact on net income
before tax $ 2,918 $ 430 579%
Average total assets
(millions) 213 193 10
------------------------------------------------------------
bp - basis point change.
teb - taxable equivalent basis, see definition following Financial
Highlights table.
(1) Net claims and adjustment expenses as a percentage of net earned
premiums.
(2) Policy acquisition costs and non-interest expenses net of commissions
and processing fees as a percentage of net earned premiums.
(3) Sum of the claims loss and expense ratios.
Fiscal 2010 Minimum Targets and Outlook
The minimum performance targets established for the 2010 fiscal year together with CWB's actual performance are presented in the table below:
-----------------------------
2010 2010
Minimum Year-to-date
Targets Performance(1)
-------------------------------------------------------------------------
Net income growth(2) 12% 64%
-------------------------------------------------------------------------
Total revenue (teb) growth 12% 36%
-------------------------------------------------------------------------
Loan growth 10% 11%
-------------------------------------------------------------------------
Provision for credit losses as a percentage
of average loans 0.15% - 0.20% 0.21%
-------------------------------------------------------------------------
Efficiency ratio (teb) 48% 43.2%
-------------------------------------------------------------------------
Return on common equity(3) 13% 17.8%
-------------------------------------------------------------------------
Return on assets(4) 0.90% 1.28%
-------------------------------------------------------------------------
(1) 2010 year-to-date performance for earnings and revenue growth is the
current year results over the same period in the prior year, loan
growth is the increase over the past twelve months, and performance
for ratio targets is the current year-to-date results annualized.
(2) Net income, before preferred share dividends.
(3) Return on common equity calculated as annualized net income after
preferred share dividends divided by average common shareholders'
equity.
(4) Return on assets calculated as annualized net income after preferred
share dividends divided by average total assets.
CWB is ahead of its 2010 minimum revenue growth and profitability targets by a considerable margin. Results reflect the robust recovery in net interest margin early in the year and generally strong results across banking, trust and insurance. The second quarter acquisition of National Leasing further augmented net interest margin and also impacted other key performance metrics, most notably the provision for credit losses and loan growth. National Leasing's portfolio earns a relatively high yield that is accompanied by increased loan losses compared to the Bank's core lending business. As stated in the prior quarter, the 2010 provision for credit losses is now expected to be 20 to 25 basis points of average loans. The rate of organic loan growth increased compared to prior quarters and the Bank now expects to achieve or surpass the 2010 target of 10%. While management will maintain expenditures necessary for effective execution of CWB's strategic plan, the 2010 efficiency ratio should also be much better than the 2010 target.
Canada's economic fundamentals appear to be improving despite ongoing uncertainty about the strength of the global economic recovery. Although management believes the level of gross impaired loans will continue to fluctuate, actual loan losses are expected to remain within acceptable levels. The Bank intends to continue to build market share while maintaining its focus on high quality loans that offer a fair and profitable return on investment. Continued growth is expected from each company within the CWB Group and the ongoing development of these businesses will remain a key priority to build value for shareholders and further diversify operations. While there are still some challenges and global economic uncertainties, the outlook for 2010 and beyond is positive.
This management's discussion and analysis is dated September 1, 2010.
Taxable Equivalent Basis (teb)
Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.
Non-GAAP Measures
Taxable equivalent basis, diluted cash earnings per common share, return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, tangible common equity to risk-weighted assets, Tier 1 and total capital adequacy ratios, average balances, claims loss ratio, expense ratio and combined ratio do not have standardized meanings prescribed by generally accepted accounting principles (GAAP) and therefore may not be comparable to similar measures presented by other financial institutions. The non-GAAP measures used in this MD&A are calculated as follows:
- taxable equivalent basis - described above;
- diluted cash earnings per common share - diluted earnings per common
share excluding the amortization of acquisition-related intangible
assets;
- return on common shareholders' equity - net income less preferred
share dividends divided by average shareholder's equity;
- return on assets - net income less preferred share dividends divided
by average total assets;
- efficiency ratio - non-interest expenses divided by total revenues
(net interest income plus other income);
- net interest margin - net interest income divided by average total
assets;
- tangible common equity to risk-weighted assets - shareholders' equity
less subsidiary goodwill divided by risk-weighted assets, calculated
in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI);
- Tier 1 and total capital adequacy ratios - in accordance with
guidelines issued by OSFI;
- average balances - average daily balances;
- claims loss ratio - net insurance claims and adjustment expenses as a
percentage of net earned premiums;
- expense ratio - policy acquisition costs and non-interest expenses
net of commissions and processing fees as a percentage of net earned
premiums; and
- combined ratio - sum of the claims loss and expense ratios.
Forward-looking Statements
From time to time, Canadian Western Bank (the Bank) makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about the Bank's objectives and strategies, targeted and expected financial results and the outlook for the Bank's businesses or for the Canadian economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could."
By their very nature, forward-looking statements involve numerous assumptions. A variety of factors, many of which are beyond the Bank's control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada including the volatility and lack of liquidity in financial markets, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and legal developments, the level of competition in the Bank's markets, the occurrence of weather-related and other natural catastrophes, changes in accounting standards and policies, the accuracy of and completeness of information the Bank receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of the Bank's business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management's ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.
These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause the Bank's actual results to differ materially from the expectations expressed in such forward looking statements. Unless required by securities law, the Bank does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2010 and how it will affect CWB's businesses are material factors the Bank considers when setting its objectives. In setting minimum performance targets for fiscal 2010, management's expectations assumed: moderate economic growth in Canada aided by positive relative performance in the four western provinces; stable or slightly higher energy and commodity prices; sound credit quality with actual losses remaining within the Bank's range of acceptable levels; modest inflationary pressures; and, an improved net interest margin resulting from lower deposit costs, a stable prime lending interest rate, favourable yields on both new lending facilities and renewed accounts, and relatively stable investment returns reflecting high quality assets held in the securities portfolio, partially offset by a reduction in the level of gains on the sale of securities compared to fiscal 2009. Through the first nine months of fiscal 2010, very strong results reflect a significant recovery in net interest margin that materialized more quickly than management anticipated and a further positive impact from the February 1st acquisition of National Leasing Group Inc. Gains on sale of securities were also much higher than management expected at the onset of fiscal 2010. The provision for credit losses measured as a percentage of average loans reflects higher inherent losses in the portfolio of National Leasing Group Inc. due to the nature of its business.
-------------------------------------------------------------------------
Consolidated Statements of Income
-------------------------------------------------------------------------
For the three months ended
(unaudited) -------------------------------------- Change from
($ thousands, except July 31 April 30 July 31 July 31
per share amounts) 2010 2010 2009 2009
-------------------------------------------------------------------------
Interest Income
Loans $ 131,779 $ 123,830 $ 112,275 17%
Securities 10,156 9,426 11,124 (9)
Deposits with
regulated financial
institutions 1,082 1,443 3,103 (65)
-------------------------------------------------------------------------
143,017 134,699 126,502 13
-------------------------------------------------------------------------
Interest Expense
Deposits 56,373 52,858 62,490 (10)
Subordinated
debentures 4,406 4,371 5,267 (16)
-------------------------------------------------------------------------
60,779 57,229 67,757 (10)
-------------------------------------------------------------------------
Net Interest Income 82,238 77,470 58,745 40
Provision for Credit
Losses (Note 5) 5,806 5,487 3,369 72
-------------------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 76,432 71,983 55,376 38
-------------------------------------------------------------------------
Other Income
Credit related 8,149 8,496 6,155 32
Insurance, net
(Note 2) 6,134 5,521 5,795 6
Trust and wealth
management services 4,260 4,499 3,557 20
Retail services 2,250 2,332 1,781 26
Gains on sale of
securities 840 4,072 6,399 (87)
Securitization
revenue 1,238 1,911 - nm
Foreign exchange
gains 620 676 876 (29)
Other 2,534 3,333 41 nm
-------------------------------------------------------------------------
26,025 30,840 24,604 6
-------------------------------------------------------------------------
Net Interest and
Other Income 102,457 102,823 79,980 28
-------------------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 32,763 32,681 26,977 21
Premises and
equipment 8,008 7,983 6,478 24
Other expenses 8,128 8,901 6,263 30
Provincial capital
taxes 401 395 492 (18)
-------------------------------------------------------------------------
49,300 49,960 40,210 23
-------------------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 53,157 52,863 39,770 34
Income Taxes 6,503 14,938 10,991 (41)
-------------------------------------------------------------------------
46,654 37,925 28,779 62
Non-Controlling
Interest in
Subsidiary 59 41 50 18
-------------------------------------------------------------------------
Net Income $ 46,595 $ 37,884 $ 28,729 62%
-------------------------------------------------------------------------
Preferred share
dividends (Note 8) $ 3,802 $ 3,802 $ 3,802 -%
Net income available
to common
shareholders 42,793 34,082 24,927 72
-------------------------------------------------------------------------
Average number of
common shares
(in thousands) 66,376 66,144 63,654 4
Average number of
diluted common shares
(in thousands) 73,146 72,670 65,439 12
-------------------------------------------------------------------------
Earnings Per Common
Share
Basic $ 0.64 $ 0.52 $ 0.39 64
Diluted 0.59 0.47 0.38 55
-------------------------------------------------------------------------
For the nine months ended
(unaudited) -------------------------- Change from
($ thousands, except July 31 July 31 July 31
per share amounts) 2010 2009 2009
------------------------------------------------------------
Interest Income
Loans $ 372,450 $ 339,371 10%
Securities 30,520 32,798 (7)
Deposits with
regulated financial
institutions 4,629 10,410 (56)
------------------------------------------------------------
407,599 382,579 7
------------------------------------------------------------
Interest Expense
Deposits 162,801 204,054 (20)
Subordinated
debentures 13,347 15,633 (15)
------------------------------------------------------------
176,148 219,687 (20)
------------------------------------------------------------
Net Interest Income 231,451 162,892 42
Provision for Credit
Losses (Note 5) 15,006 10,107 48
------------------------------------------------------------
Net Interest Income
after Provision for
Credit Losses 216,445 152,785 42
------------------------------------------------------------
Other Income
Credit related 23,923 17,219 39
Insurance, net
(Note 2) 17,325 12,105 43
Trust and wealth
management services 13,229 11,339 17
Retail services 6,598 5,538 19
Gains on sale of
securities 11,409 21,122 (46)
Securitization
revenue 3,149 - nm
Foreign exchange
gains 1,731 2,098 (17)
Other 5,867 104 nm
------------------------------------------------------------
83,231 69,525 20
------------------------------------------------------------
Net Interest and
Other Income 299,676 222,310 35
------------------------------------------------------------
Non-Interest Expenses
Salaries and
employee benefits 91,834 77,401 19
Premises and
equipment 23,019 19,034 21
Other expenses 23,549 18,742 26
Provincial capital
taxes 1,106 1,432 (23)
------------------------------------------------------------
139,508 116,609 20
------------------------------------------------------------
Net Income before
Income Taxes and
Non-Controlling
Interest in
Subsidiary 160,168 105,701 52
Income Taxes 35,478 29,600 20
------------------------------------------------------------
124,690 76,101 64
Non-Controlling
Interest in
Subsidiary 176 173 2
------------------------------------------------------------
Net Income $ 124,514 $ 75,928 64%
------------------------------------------------------------
Preferred share
dividends (Note 8) $ 11,405 $ 6,260 82%
Net income available
to common
shareholders 113,109 69,668 62
------------------------------------------------------------
Average number of
common shares
(in thousands) 65,476 63,541 3
Average number of
diluted common shares
(in thousands) 71,963 64,222 12
------------------------------------------------------------
Earnings Per Common
Share
Basic $ 1.73 $ 1.10 57
Diluted 1.57 1.08 45
------------------------------------------------------------
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Balance Sheets
-------------------------------------------------------------------------
Change
As at As at As at As at from
(unaudited) July 31 April 30 October 31 July 31 July 31
($ thousands) 2010 2010 2009 2009 2009
-------------------------------------------------------------------------
Assets
Cash Resources
Cash and non-
interest
bearing
deposits
with
financial
institu-
tions $ 20,348 $ 15,343 $ 17,447 $ 38,297 (47)%
Interest
bearing
deposits
with
regulated
financial
institutions
(Note 3) 182,808 188,705 266,980 357,057 (49)
Cheques and
other items
in transit 4,984 633 12,677 - nm
-------------------------------------------------------------------------
208,140 204,681 297,104 395,354 (47)
-------------------------------------------------------------------------
Securities
(Note 3)
Issued or
guaranteed
by Canada 392,688 508,267 854,457 611,644 (36)
Issued or
guaranteed
by a province
or munici-
pality 73,132 103,318 253,143 334,370 (78)
Other
securities 803,358 762,760 783,809 656,029 22
-------------------------------------------------------------------------
1,269,178 1,374,345 1,891,409 1,602,043 (21)
-------------------------------------------------------------------------
Securities
Purchased
Under
Resale
Agreements 220,122 247,682 - - nm
-------------------------------------------------------------------------
Loans (Notes
4 and 6)
Residential
mortgages 2,318,665 2,292,578 2,282,475 2,100,432 10
Other loans 7,861,947 7,650,477 7,029,177 7,111,545 11
-------------------------------------------------------------------------
10,180,612 9,943,055 9,311,652 9,211,977 11
Allowance
for credit
losses
(Note 5) (75,746) (76,386) (75,459) (74,214) 2
-------------------------------------------------------------------------
10,104,866 9,866,669 9,236,193 9,137,763 11
-------------------------------------------------------------------------
Other
Land,
buildings
and
equipment 61,709 57,859 39,252 31,738 94
Goodwill 37,438 37,191 9,360 9,360 300
Other
intangible
assets 44,677 45,618 6,465 6,801 557
Insurance
related 58,914 55,254 55,932 55,500 6
Derivative
related
(Note 7) 83 231 2,334 4,081 (98)
Other assets 105,046 114,751 97,823 88,737 18
-------------------------------------------------------------------------
307,867 310,904 211,166 196,217 57
-------------------------------------------------------------------------
Total Assets $12,110,173 $12,004,281 $11,635,872 $11,331,377 7%
-------------------------------------------------------------------------
Liabilities
and Share-
holders'
Equity
Deposits
Payable on
demand $ 519,565 $ 530,995 $ 359,176 $ 395,128 31%
Payable
after
notice 2,986,572 2,963,594 2,778,601 2,239,682 33
Payable on
a fixed
date 6,645,905 6,585,454 6,374,461 6,653,999 -
Deposit
from
Canadian
Western
Bank
Capital
Trust 105,000 105,000 105,000 105,000 -
-------------------------------------------------------------------------
10,257,042 10,185,043 9,617,238 9,393,809 9
-------------------------------------------------------------------------
Other
Cheques and
other items
in transit 31,728 34,565 41,964 27,472 15
Insurance
related 144,198 135,482 145,509 138,996 4
Derivative
related
(Note 7) 1,080 745 74 164 559
Securities
sold under
repurchase
agreements - - 300,242 246,794 nm
Other
liabilities 243,010 256,335 169,346 182,910 33
-------------------------------------------------------------------------
420,016 427,127 657,135 596,336 (30)
-------------------------------------------------------------------------
Subordinated
Debentures
Conventional 315,000 315,000 375,000 375,000 (16)
-------------------------------------------------------------------------
Shareholders'
Equity
Preferred
shares
(Note 8) 209,750 209,750 209,750 209,750 -
Common
shares
(Note 8) 276,930 274,223 226,480 224,405 23
Contributed
surplus 21,225 20,630 19,366 18,708 13
Retained
earnings 595,026 566,989 511,784 492,274 21
Accumulated
other
comprehensive
income 15,184 5,519 19,119 21,095 (28)
-------------------------------------------------------------------------
1,118,115 1,077,111 986,499 966,232 16
-------------------------------------------------------------------------
Total
Liabilities
and
Shareholders'
Equity $12,110,173 $12,004,281 $11,635,872 $11,331,377 7%
-------------------------------------------------------------------------
Contingent Liabilities and Commitments (Note 10)
nm - not meaningful.
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-------------------------------------------------------------------------
For the nine months ended
---------------------------
(unaudited) July 31 July 31
($ thousands) 2010 2009
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 511,784 $ 448,203
Net income 124,514 75,928
Dividends - Preferred shares (11,405) (6,260)
- Common shares (21,607) (20,969)
Warrants purchased under normal course
issuer bid (Note 8) (8,155) -
Issuance costs on common shares (105) -
Issuance costs on preferred units - (4,628)
-------------------------------------------------------------------------
Balance at end of period 595,026 492,274
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period 19,119 (5,203)
Other comprehensive income (3,935) 26,298
-------------------------------------------------------------------------
Balance at end of period 15,184 21,095
-------------------------------------------------------------------------
Total retained earnings and accumulated
other comprehensive income 610,210 513,369
-------------------------------------------------------------------------
Preferred Shares (Note 8)
Balance at beginning of period 209,750 -
Issued during the period - 209,750
-------------------------------------------------------------------------
Balance at end of period 209,750 209,750
-------------------------------------------------------------------------
Common Shares (Note 8)
Balance at beginning of period 226,480 221,914
Issued on acquisition (Note 15) 42,582 -
Issued on exercise of options 3,359 1,306
Issued under dividend reinvestment plan 2,423 -
Transferred from contributed surplus on
exercise or exchange of options 1,926 1,185
Issued on exercise of warrants 160 -
-------------------------------------------------------------------------
Balance at end of period 276,930 224,405
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 19,366 14,234
Amortization of fair value of options 3,785 5,659
Transferred to common shares on exercise
or exchange of options (1,926) (1,185)
-------------------------------------------------------------------------
Balance at end of period 21,225 18,708
-------------------------------------------------------------------------
Total Shareholders' Equity $ 1,118,115 $ 966,232
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
-------------------------------------------------------------------------
For the
For the three months ended nine months ended
--------------------------- -------------------------
(unaudited) July 31 July 31 July 31 July 31
($ thousands) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net Income $ 46,595 $ 28,729 $ 124,514 $ 75,928
-------------------------------------------------------------------------
Other Comprehensive
Income (Loss), net
of tax
Available-for-sale
securities:
Gains (losses)
from change in
fair value(1) 10,264 14,904 5,647 45,452
Reclassification
to other income(2) (572) (4,504) (7,986) (14,884)
-------------------------------------------------------------------------
9,692 10,400 (2,339) 30,568
-------------------------------------------------------------------------
Derivatives designated
as cash flow hedges:
Gains (losses) from
change in fair
value(3) - 2,596 17 8,564
Reclassification to
net interest
income(4) (27) (2,429) (1,613) (7,424)
Reclassification to
other liabilities
for derivatives
terminated prior
to maturity(5) - - - (5,410)
-------------------------------------------------------------------------
(27) 167 (1,596) (4,270)
-------------------------------------------------------------------------
9,665 10,567 (3,935) 26,298
-------------------------------------------------------------------------
Comprehensive Income
for the Period $ 56,260 $ 39,296 $ 120,579 $ 102,226
-------------------------------------------------------------------------
(1) Net of income tax expense of $4,163 and $2,198 for the three and nine
months ended July 31, 2010, respectively (2009 - $6,267 and $19,047).
(2) Net of income tax benefit of $245 and $3,423 for the three and nine
months ended July 31, 2010, respectively (2009 - $1,895 and $6,267).
(3) Net of income tax expense of nil and $7 for the three and nine months
ended July 31, 2010, respectively (2009 - $1,087 and $3,854).
(4) Net of income tax benefit of $12 and $672 for the three and nine
months ended July 31, 2010, respectively (2009 - $1,016 and $3,107).
(5) Net of income tax benefit of nil for the three and nine months ended
July 31, 2010 (2009 - nil and $2,264).
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Consolidated Statements of Cash Flow
-------------------------------------------------------------------------
For the
For the three months ended nine months ended
--------------------------- -------------------------
(unaudited) July 31 July 31 July 31 July 31
($ thousands) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash Flows from
Operating Activities
Net income $ 46,595 $ 28,729 $ 124,514 $ 75,928
Adjustments to
determine net
cash flows:
Provision for
credit losses 5,806 3,369 15,006 10,107
Depreciation and
amortization 3,882 2,156 10,084 6,441
Amortization of
fair value of
employee stock
options 1,322 1,078 3,785 5,659
Future income
taxes, net 6,134 (6,651) 8,166 (10,963)
Gain on sale of
securities, net (840) (6,399) (11,409) (21,122)
Accrued interest
receivable and
payable, net 19,460 14,970 7,155 30,031
Current income
taxes payable, net (5,805) 8,993 (19,809) 6,946
Other items, net (19,201) 2,676 35,436 10,204
-------------------------------------------------------------------------
57,353 48,921 172,928 113,231
-------------------------------------------------------------------------
Cash Flows from
Financing Activities
Deposits, net 71,998 (319,525) 639,804 148,090
Common shares issued
(Note 8) 1,980 913 5,942 1,306
Warrants purchased
under normal course
issuer bid (Note 8) (7,457) - (8,155) -
Dividends (11,101) (10,806) (33,012) (27,229)
Issuance costs on
share capital - (2) (105) (4,628)
Long-term debt
repaid (Note 15) - - (270,630) -
Securities sold
under repurchase
agreements, net - 163,326 (300,242) 246,794
Debentures redeemed - - (60,000) -
Preferred units issued - - - 209,750
-------------------------------------------------------------------------
55,420 (166,094) (26,398) 574,083
-------------------------------------------------------------------------
Cash Flows from
Investing Activities
Interest bearing
deposits with
regulated financial
institutions, net 5,450 198,030 81,825 116,202
Securities, purchased (260,164) (803,484) (2,289,513) (2,319,758)
Securities, sale
proceeds 194,021 705,305 2,468,084 1,694,881
Securities, matured 183,502 160,298 446,693 291,876
Securities purchased
under resale
agreements, net 27,560 - (220,122) 77,000
Loans, net (244,002) (99,614) (560,472) (523,801)
Land, buildings
and equipment (6,476) (3,237) (14,050) (5,352)
Business acquisition
(Note 15) (471) - (53,531) (6,481)
-------------------------------------------------------------------------
(100,580) 157,298 (141,086) (675,433)
-------------------------------------------------------------------------
Change in Cash and
Cash Equivalents 12,193 40,125 5,444 11,881
Cash and Cash
Equivalents at
Beginning of Period (18,589) (29,300) (11,840) (1,056)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End
of Period* $ (6,396) $ 10,825 $ (6,396) $ 10,825
-------------------------------------------------------------------------
* Represented by:
Cash and non-
interest bearing
deposits with
financial
institutions $ 20,348 $ 38,297 $ 20,348 $ 38,297
Cheques and other
items in transit
(included in
Cash Resources) 4,984 - 4,984 -
Cheques and other
items in transit
(included in
Other Liabilities) (31,728) (27,472) (31,728) (27,472)
-------------------------------------------------------------------------
Cash and Cash
Equivalents at End
of Period $ (6,396) $ 10,825 $ (6,396) $ 10,825
-------------------------------------------------------------------------
Supplemental
Disclosure of Cash
Flow Information
Amount of interest
paid in the
period $ 43,609 $ 57,240 $ 182,003 $ 190,201
Amount of income
taxes paid in the
period 6,174 8,649 47,122 33,617
-------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated
financial statements.
-------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
-------------------------------------------------------------------------
(unaudited)
($ thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP), including the accounting requirements of the
Office of the Superintendent of Financial Institutions Canada (OSFI),
using the same accounting policies as the audited consolidated
financial statements for the year ended October 31, 2009. Under
Canadian GAAP, additional disclosures are required in annual
financial statements and accordingly, these unaudited interim
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended
October 31, 2009 as set out on pages 66 to 100 of the Bank's 2009
Annual Report.
2. Insurance Revenues, Net
Insurance revenues, net, as reported in other income on the
consolidated statement of income is presented net of net claims and
adjustment expenses and policy acquisition costs.
For the
For the three months ended nine months ended
------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Net earned
premiums $ 28,858 $ 26,627 $ 26,895 $ 82,816 $ 76,990
Commissions and
processing fees 606 546 741 1,770 2,155
Net claims and
adjustment
expenses (17,023) (15,784) (16,660) (49,797) (51,437)
Policy acquisition
costs (6,307) (5,868) (5,181) (17,464) (15,603)
-------------------------------------------------------------------------
Total, net $ 6,134 $ 5,521 $ 5,795 $ 17,325 $ 12,105
-------------------------------------------------------------------------
3. Securities
Net unrealized gains (losses) reflected on the balance sheet follow:
As at As at As at
July 31 April 30 October 31
2010 2010 2009
---------------------------------------------------------------------
Interest bearing deposits with
regulated financial institutions $ 2,571 $ 3,018 $ 7,390
Securities issued or guaranteed by
Canada (326) (2,662) 1,594
A province or municipality 793 506 2,547
Other debt securities 3,117 2,913 6,898
Equity securities
Preferred shares 11,948 (835) 5,810
Common shares 3,130 4,706 558
---------------------------------------------------------------------
Unrealized gain, net $ 21,233 $ 7,646 $ 24,797
---------------------------------------------------------------------
The securities portfolio is primarily comprised of high quality debt
instruments, preferred shares and common shares that are not held for
trading purposes and, where applicable, are typically held until
maturity. Fluctuations in value are generally attributed to changes
in interest rates, market credit spreads and shifts in the interest
rate curve. Unrealized losses are considered to be other than
permanent in nature.
4. Loans
The composition of the Bank's loan portfolio by geographic region and
industry sector follow:
British Saskat-
($ millions) Columbia Alberta chewan Manitoba Other Total
-------------------------------------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) $ 969 $ 998 $ 135 $ 65 $ 152 $ 2,319
Other loans 69 99 14 4 1 187
-------------------------------------------------------------------------
1,038 1,097 149 69 153 2,506
-------------------------------------------------------------------------
Loans to
Businesses
Commercial 781 1,408 108 91 290 2,678
Construction
and real
estate(3) 1,254 1,480 226 69 180 3,209
Equipment
financing 324 680 104 52 382 1,542
Energy - 246 - - - 246
-------------------------------------------------------------------------
2,359 3,814 438 212 852 7,675
-------------------------------------------------------------------------
Total Loans(1) $ 3,397 $ 4,911 $ 587 $ 281 $ 1,005 $10,181
-------------------------------------------------------------------------
Composition
Percentage
July 31, 2010 33% 48% 6% 3% 10% 100%
April 30, 2010 34% 48% 6% 3% 9% 100%
October 31,
2009 35% 50% 5% 3% 7% 100%
-------------------------------------------------------------------------
July 31 April 30 October 31
2010 2010 2009
Composition Composition Composition
Percentage Percentage Percentage
-----------------------------------------------
Loans to
Individuals
Residential
mort-
gages(2) 23% 23% 25%
Other loans 2 2 2
-----------------------------------------------
25 25 27
-----------------------------------------------
Loans to
Businesses
Commercial 26 26 27
Construction
and real
estate(3) 32 32 31
Equipment
financing 15 15 13
Energy 2 2 2
-----------------------------------------------
75 75 73
-----------------------------------------------
Total Loans(1) 100% 100% 100%
-----------------------------------------------
Composition
Percentage
July 31, 2010
April 30, 2010
October 31,
2009
-----------------------------------------------
(1) This table does not include an allocation for credit losses or
deferred revenue and premiums.
(2) Includes single- and multi-unit residential mortgages and project
(interim) mortgages on residential property.
(3) Includes commercial term mortgages and project (interim) mortgages
for non-residential property.
5. Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses:
For the three months ended
July 31, 2010
----------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 18,381 $ 58,005 $ 76,386
Allowance acquired (Note 15) - - -
Provision for credit losses 4,772 1,034 5,806
Write-offs (6,633) - (6,633)
Recoveries 187 - 187
-------------------------------------------------------------------------
Balance at end of period $ 16,707 $ 59,039 $ 75,746
-------------------------------------------------------------------------
For the three months ended
April 30, 2010
----------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 13,531 $ 59,039 $ 72,570
Allowance acquired (Note 15) 2,596 4,172 6,768
Provision for credit losses 10,693 (5,206) 5,487
Write-offs (8,530) - (8,530)
Recoveries 91 - 91
-------------------------------------------------------------------------
Balance at end of period $ 18,381 $ 58,005 $ 76,386
-------------------------------------------------------------------------
For the three months ended
July 31, 2009
----------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 14,084 $ 61,015 $ 75,099
Provision for credit losses 3,168 201 3,369
Write-offs (4,455) - (4,455)
Recoveries 201 - 201
-------------------------------------------------------------------------
Balance at end of period $ 12,998 $ 61,216 $ 74,214
-------------------------------------------------------------------------
For the nine months ended
July 31, 2010
----------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 14,306 $ 61,153 $ 75,459
Allowance acquired (Note 15) 2,596 4,172 6,768
Provision for credit losses 21,292 (6,286) 15,006
Write-offs (21,768) - (21,768)
Recoveries 281 - 281
-------------------------------------------------------------------------
Balance at end of period $ 16,707 $ 59,039 $ 75,746
-------------------------------------------------------------------------
For the nine months ended
July 31, 2009
----------------------------------------
General
Allowance
Specific for Credit
Allowance Losses Total
-------------------------------------------------------------------------
Balance at beginning of period $ 15,011 $ 60,527 $ 75,538
Allowance acquired (Note 15) - - -
Provision for credit losses 9,418 689 10,107
Write-offs (11,678) - (11,678)
Recoveries 247 - 247
-------------------------------------------------------------------------
Balance at end of period $ 12,998 $ 61,216 $ 74,214
-------------------------------------------------------------------------
6. Impaired and Past Due Loans
Outstanding gross loans and impaired loans, net of allowances for
credit losses, by loan type, are as follows:
As at July 31, 2010
--------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
-------------------------------------------------------------------------
Consumer and personal $ 1,716,898 $ 21,517 $ 1,739 $ 19,778
Real estate(1) 3,982,290 93,320 4,934 88,386
Equipment financing 1,789,922 28,163 9,425 18,738
Commercial 2,691,502 6,976 609 6,367
-------------------------------------------------------------------------
Total(2) $10,180,612 $ 149,976 $ 16,707 133,269
------------------------------------------------------------
General allowance(3) (59,039)
-------------------------------------------------------------------------
Net impaired loans
after general
allowance $ 74,230
-------------------------------------------------------------------------
As at April 30, 2010
--------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
-------------------------------------------------------------------------
Consumer and personal $ 1,618,061 $ 19,746 $ 1,722 $ 18,024
Real estate(1) 4,077,489 101,228 5,884 95,344
Equipment financing 1,629,344 21,322 4,897 16,425
Commercial 2,618,161 24,933 5,878 19,055
-------------------------------------------------------------------------
Total(2) $ 9,943,055 $ 167,229 $ 18,381 148,848
------------------------------------------------------------
General allowance(3) (58,005)
-------------------------------------------------------------------------
Net impaired loans
after general
allowance $ 90,843
-------------------------------------------------------------------------
As at October 31, 2009
--------------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
-------------------------------------------------------------------------
Consumer and personal $ 1,452,682 $ 14,805 $ 1,207 $ 13,598
Real estate(1) 3,909,991 76,643 5,611 71,032
Equipment financing 1,412,344 26,408 6,196 20,212
Commercial 2,536,635 20,088 1,292 18,796
-------------------------------------------------------------------------
Total(2) $ 9,311,652 $ 137,944 $ 14,306 123,638
------------------------------------------------------------
General allowance(3) (61,153)
-------------------------------------------------------------------------
Net impaired loans
after general
allowance $ 62,485
-------------------------------------------------------------------------
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans includes foreclosed assets with a carrying value
of $2,081 (April 30, 2010 - $695 and October 31, 2009 - $nil) which
are held for sale.
(3) The general allowance for credit risk is not allocated by loan type.
Outstanding impaired loans, net of allowance for credit losses, by
provincial location of security, are as follows:
As at July 31, 2010
----------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
-------------------------------------------------------------------------
Alberta $ 110,891 $ 11,563 $ 99,328
British Columbia 32,833 2,210 30,623
Saskatchewan 2,376 1,004 1,372
Manitoba 500 250 250
Other 3,376 1,680 1,696
-------------------------------------------------------------------------
Total $ 149,976 $ 16,707 133,269
------------------------------------------------------------
General allowance(1) (59,039)
-------------------------------------------------------------------------
Net impaired loans after
general allowance $ 74,230
-------------------------------------------------------------------------
As at April 30, 2010
----------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
-------------------------------------------------------------------------
Alberta $ 111,487 $ 12,943 $ 98,544
British Columbia 32,260 2,379 29,881
Saskatchewan 2,002 933 1,069
Manitoba 749 210 539
Other 20,731 1,916 18,815
-------------------------------------------------------------------------
Total $ 167,229 $ 18,381 148,848
------------------------------------------------------------
General allowance(1) (58,005)
-------------------------------------------------------------------------
Net impaired loans after
general allowance $ 90,843
-------------------------------------------------------------------------
As at October 31, 2009
----------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
-------------------------------------------------------------------------
Alberta $ 74,847 $ 7,651 $ 67,196
British Columbia 37,655 5,000 32,655
Saskatchewan 1,632 609 1,023
Manitoba 337 23 314
Other 23,473 1,023 22,450
-------------------------------------------------------------------------
Total $ 137,944 $ 14,306 123,638
------------------------------------------------------------
General allowance(1) (61,153)
-------------------------------------------------------------------------
Net impaired loans after
general allowance $ 62,485
-------------------------------------------------------------------------
(1) The general allowance for credit risk is not allocated by province.
During the three and nine months ended July 31, 2010, interest
recognized as income on impaired loans totaled $1,085 and $2,689
respectively (2009 - $468 and $1,400).
Gross impaired loans exclude certain past due loans where payment of
interest or principal is contractually in arrears, which are not
classified as impaired. Details of such past due loans that have not
been included in the gross impaired amount are as follows:
As at July 31, 2010
-----------------------------------------------------
1 - 30 31 - 60 61 - 90 More than
days days days 90 days Total
-------------------------------------------------------------------------
Residential
mortgages $ 7,606 $ 5,953 $ 1,281 $ 517 $ 15,357
Other loans 9,757 25,859 1,194 - 36,810
-------------------------------------------------------------------------
$ 17,363 $ 31,812 $ 2,475 $ 517 $ 52,167
-------------------------------------------------------------------------
Total as at
April 30, 2010 $ 43,552 $ 5,090 $ 484 $ 456 $ 49,582
-------------------------------------------------------------------------
Total as at
October 31, 2009 $ 27,533 $ 29,272 $ 4,694 $ - $ 61,499
-------------------------------------------------------------------------
7. Derivative Financial Instruments
The Bank designates certain derivative financial instruments as
either a hedge of the fair value of recognized assets or liabilities
or firm commitments (fair value hedges), or a hedge of highly
probable future cash flows attributable to a recognized asset or
liability or a forecasted transaction (cash flow hedges). On an
ongoing basis, the Bank assesses whether the derivatives that are
used in hedging transactions are effective in offsetting changes in
fair values or cash flows of the hedged items. If a hedging
transaction becomes ineffective or if the derivative is not
designated as a cash flow hedge, any subsequent change in the fair
value of the hedging instrument is recognized in earnings. Prior to
February 1, 2010, all interest rate swaps were designated as cash
flow hedges. Subsequent to February 1, 2010 with the acquisition of
National Leasing (see Note 15), the Bank has interest rate swaps not
designated as hedges. As at July 31, 2010, all interest rate swaps
designated as cash flow hedges have matured.
For the three and nine months ended July 31, 2010, a net unrealized
after tax gain of $nil and $17 respectively (2009 - $2,596 and
$8,564) was recorded in other comprehensive income for changes in
fair value of the effective portion of derivatives designated as cash
flow hedges, and $nil (2009 - $nil) was recorded in other income for
changes in fair value of the ineffective portion of derivatives
classified as cash flow hedges. Amounts accumulated in other
comprehensive income are reclassified to net income in the same
period that interest on certain floating rate loans (i.e. the hedged
items) affect income. For the three and nine months ended July 31,
2010, a net gain after tax of $27 and $1,613 respectively (2009 -
$2,429 and $7,424) was reclassified to net income. A net gain of $nil
(2009 - $2,958) after tax recorded in accumulated other comprehensive
income as at July 31, 2010 is expected to be reclassified to net
income in the next twelve months and will offset variable cash flows
from floating rate loans.
The following table shows the notional value outstanding for
derivative financial instruments and the related fair value:
As at July 31, 2010
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
-------------------------------------------------------------------------
Interest rate swaps not designated
as hedges(1) $ 52,490 $ - $ 1,013
Interest rate swaps designated as
cash flow hedges - - -
Equity contracts(2) 500 - 1
Foreign exchange contracts(3) 43,270 83 64
Embedded derivatives in
equity-linked deposits(2) n/a - 2
Other forecasted transactions - - -
-------------------------------------------------------------------------
Derivative related amounts $ 83 $ 1,080
-------------------------------------------------------------------------
As at April 30, 2010
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
-------------------------------------------------------------------------
Interest rate swaps not designated
as hedges(1) $ 60,910 $ - $ 687
Interest rate swaps designated as
cash flow hedges 25,000 39 -
Equity contracts(2) 500 3 -
Foreign exchange contracts(3) 49,004 189 54
Embedded derivatives in
equity-linked deposits(2) n/a - 4
Other forecasted transactions - - -
-------------------------------------------------------------------------
Derivative related amounts $ 231 $ 745
-------------------------------------------------------------------------
As at October 31, 2009
--------------------------------------
Notional Positive Negative
Amount Fair Value Fair Value
-------------------------------------------------------------------------
Interest rate swaps not designated
as hedges $ - $ - $ -
Interest rate swaps designated as
cash flow hedges 235,000 2,265 -
Equity contracts 2,000 - 33
Foreign exchange contracts 2,496 44 41
Embedded derivatives in equity-
linked deposits n/a 25 -
Other forecasted transactions - - -
-------------------------------------------------------------------------
Derivative related amounts $ 2,334 $ 74
-------------------------------------------------------------------------
(1) Interest rate swaps not designated as hedges outstanding at July 31,
2010 mature between August 2010 and April 2014.
(2) Equity contract and equity-linked deposits outstanding at July 31,
2010 mature March 2011.
(3) Foreign exchange contracts outstanding at July 31, 2010 mature
between August 2010 and June 2011.
n/a - not applicable.
There were no forecasted transactions that failed to occur during the
three and nine months ended July 31, 2010.
8. Capital Stock
Share Capital
For the nine months ended
---------------------------------------------------
July 31, 2010 July 31, 2009
---------------------------------------------------
Number of Number of
Shares Amount Shares Amount
-------------------------------------------------------------------------
Preferred Shares -
Series 3
Outstanding at
beginning of period 8,390,000 $ 209,750 8,390,000 $ 209,750
Issued during the
period - - - -
-------------------------------------------------------------------------
Outstanding at end
of period(1) 8,390,000 209,750 8,390,000 209,750
-------------------------------------------------------------------------
Common Shares
Outstanding at
beginning of period 63,903,460 226,480 63,457,142 221,914
Issued on acquisition
(Note 15) 2,065,088 42,582 - -
Issued on exercise or
exchange of options 459,956 3,359 280,971 1,306
Issued under dividend
reinvestment plan(2) 106,625 2,423 - -
Issued on exercise of
warrants 11,468 160 - -
Transferred from
contributed surplus
on exercise or
exchange of options - 1,926 - 1,185
-------------------------------------------------------------------------
Outstanding at end
of period 66,546,597 276,930 63,738,113 224,405
-------------------------------------------------------------------------
Share Capital $ 486,680 $ 434,155
-------------------------------------------------------------------------
(1) Holders of the Preferred Shares - Series 3 are entitled to
receive non-cumulative quarterly fixed dividends for the initial
five-year period ending April 30, 2014 of 7.25% per annum,
payable quarterly, as and when declared. For further information
on dividend rates after April 30, 2014, refer to Note 18 of the
audited consolidated financial statements for the year ended
October 31, 2009 (see page 85 of the 2009 Annual Report).
(2) During the quarter, shares were issued at a 2% discount from the
average closing price of the five trading days preceding the
dividend payment date.
Warrants to Purchase Common Shares
For the nine months ended
------------------------------
July 31 July 31
Number of Warrants 2010 2009
-------------------------------------------------------------------------
Outstanding at beginning of period 14,964,356 -
Issued - 14,964,980
Purchased and cancelled (746,504) -
Exercised (11,468) -
-------------------------------------------------------------------------
Outstanding at end of period 14,206,384 14,964,980
-------------------------------------------------------------------------
Normal Course Issuer Bid
On January 18, 2010, the Bank received approval from the Toronto
Stock Exchange to institute a Normal Course Issuer Bid (NCIB) to
purchase and cancel up to 748,058 of its warrants. The NCIB commenced
January 20, 2010 and will expire January 19, 2011. For the three and
nine months ended July 31, 2010 the Bank purchased and cancelled
673,576 and 746,504 warrants at an aggregate cost of $7,458 and
$8,155, respectively, which was charged to retained earnings.
9. Stock-Based Compensation
Stock Options
For the three months ended
------------------------------------------------
July 31, 2010 July 31, 2009
------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Options
Balance at beginning
of period 4,243,621 $ 19.31 4,444,255 $ 18.05
Granted 274,095 23.43 458,500 16.89
Exercised or
exchanged (478,885) 16.76 (259,300) 10.29
Forfeited (26,532) 24.35 (17,050) 17.65
-------------------------------------------------------------------------
Balance at end of
period 4,012,299 $ 19.86 4,626,405 $ 18.37
-------------------------------------------------------------------------
For the nine months ended
------------------------------------------------
July 31, 2010 July 31, 2009
------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Options
Balance at beginning
of period 4,394,605 $ 18.65 5,204,882 $ 20.83
Granted 632,386 22.67 1,465,035 13.33
Exercised or
exchanged (932,185) 16.00 (725,300) 10.14
Forfeited (82,507) 20.70 (1,318,212) 27.00
-------------------------------------------------------------------------
Balance at end of
period 4,012,299 $ 19.86 4,626,405 $ 18.37
-------------------------------------------------------------------------
The terms of the share incentive plan allow the holders of vested
options a cashless settlement alternative whereby the option holder
can either (a) elect to receive shares by delivering cash to the
Bank in the amount of the option exercise price or (b) elect to
receive the number of shares equivalent to the excess of the market
value of the shares under option over the exercise price. Of the
932,185 options (2009 - 725,300) exercised or exchanged in the nine
months ended July 31, 2010, option holders exchanged the rights to
716,800 options (2009 - 602,300) and received 244,571 shares (2009 -
157,971) in return under the cashless settlement alternative.
For the nine months ended July 31, 2010, salary expense of $3,785
(2009 - $5,659) was recognized relating to the estimated fair value
of options. The fair value of options granted was estimated using a
binomial option pricing model with the following variables and
assumptions: (i) risk-free interest rate of 2.6% (2009 - 2.2%),
(ii) expected option life of 4.0 years (2009 - 4.0 years),
(iii) expected volatility of 44% (2009 - 38%), and (iv) expected
dividends of 2.1% (2009 - 3.6%). The weighted average fair value of
options granted was estimated at $7.42 (2009 - $2.94) per share.
Further details relating to stock options outstanding and
exercisable at July 31, 2010 follow:
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number of Life Exercise Number of Exercise
Prices Options (years) Price Options Price
-------------------------------------------------------------------------
$ 8.58 to $11.76 953,000 3.4 $ 11.70 - $ -
$16.38 to $17.48 578,250 3.0 16.82 140,500 16.58
$21.11 to $21.46 985,490 1.4 21.46 714,700 21.46
$22.09 to $26.38 1,279,029 3.3 24.18 415,900 25.42
$28.11 to $31.18 216,530 2.4 31.13 - -
-------------------------------------------------------------------------
Total 4,012,299 2.8 $ 19.86 1,271,100 $ 22.21
-------------------------------------------------------------------------
Restricted Share Units Under the Restricted Share Unit (RSU) plan,
certain employees are eligible to receive an award in the form of
RSUs. Each RSU entitles the holder to receive the cash equivalent of
the market value of the Bank's common shares at the vesting date and
an amount equivalent to the dividends paid on the common shares
during the vesting period. RSUs vest on each anniversary of the
grant in equal one-third installments over a vesting period of three
years. Salary expense is recognized evenly over the vesting period,
except where the employee is eligible to retire prior to the vesting
date, in which case the expense is recognized between the grant date
and the date the employee is eligible to retire.
For the nine months ended July 31, 2010, salary expense of $3,265
was recognized related to RSUs (2009 - $2,159). As at July 31, 2010,
the liability for the RSUs held under this plan was $4,971 (2009 -
$2,159). At the end of each period, the liability and salary expense
are adjusted to reflect changes in the market value of the Bank's
common shares. As at July 31, 2010, 473,318 RSUs were outstanding
(2009 - 286,929).
Deferred Share Units
During the year, the Bank adopted a plan to grant Deferred Share
Units (DSUs) by linking a portion of annual director compensation to
the future value of the Bank's common shares. Under this plan,
directors will receive at least 50% of their annual retainer in DSUs.
The DSUs are not redeemable until the individual is no longer a
director and must be redeemed for cash. Common share dividend
equivalents accrue to the directors in the form of additional units.
As at July 31, 2010, 23,943 DSUs were outstanding (2009 - nil).
The expense related to the DSUs is recorded in the period the award
is earned by the director. For the nine months ended July 31, 2010,
non-interest expense "other expenses" included $125 related to DSUs
(2009 - nil). As at July 31, 2010, the liability for DSUs was $622
(2009 - nil). At the end of each period, the liability and expense
are adjusted to reflect changes in the market value of the Bank's
common shares.
10. Contingent Liabilities and Commitments
Significant contingent liabilities and commitments, including
guarantees provided to third parties, are discussed in Note 20 of
the Bank's audited consolidated financial statements for the year
ended October 31, 2009 (see page 88 of the 2009 Annual Report) and
include:
As at As at As at
July 31 April 30 October 31
2010 2010 2009
---------------------------------------------------------------------
Guarantees and standby letters
of credit
Balance outstanding $ 258,038 $ 214,144 $ 196,380
Business credit cards
Total approved limit 12,813 12,660 10,496
Balance outstanding 2,940 2,772 2,566
---------------------------------------------------------------------
In the ordinary course of business, the Bank and its subsidiaries
are party to legal proceedings. Based on current knowledge,
management does not expect the outcome of any of these proceedings
to have a material effect on the consolidated financial position or
results of operations.
11. Financial Instruments
As a financial institution, most of the Bank's balance sheet is
comprised of financial instruments and the majority of net income
results from gains, losses, income and expenses related to the same.
Financial instrument assets include cash resources, securities,
securities purchased under resale agreements, loans and derivative
financial instruments. Financial instrument liabilities include
deposits, securities sold under repurchase agreements, derivative
financial instruments and subordinated debentures.
The use of financial instruments exposes the Bank to credit,
liquidity and market risk. A discussion of how these and other risks
are managed can be found in the 2009 consolidated annual financial
statements.
The value of financial assets recorded on the consolidated balance
sheets at July 31, 2010 at fair value (cash, securities, securities
purchased under resale agreements and derivatives) was determined
using published market prices quoted in active markets for 85%
(2009 - 86%) of the portfolio and estimated using a valuation
technique based on observable market data for 15% (2009 - 14%) of
the portfolio. The value of liabilities recorded on the consolidated
balance sheet at fair value (derivatives and securities sold under
repurchase agreements) was determined using a valuation technique
based on observable market data. There were no financial instruments
that were measured using unobservable market data.
The table below sets out the fair values of financial instruments
(including certain derivatives) using the valuation methods and
assumptions outlined in the 2009 consolidated annual financial
statements. The table does not include assets and liabilities that
are not considered financial instruments.
July 31, 2010
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 208,140 $ 208,140 $ -
Securities 1,269,178 1,269,178 -
Securities purchased under
resale agreements 220,122 220,122 -
Loans(1) 10,087,871 10,123,480 35,609
Other assets(2) 118,563 118,563 -
Derivative related 83 83 -
Liabilities
Deposits(1) 10,270,199 10,335,117 64,918
Other liabilities(3) 290,624 290,624 -
Securities sold under
repurchase agreements - - -
Subordinated debentures 315,000 318,636 3,636
Derivative related 1,080 1,080 -
---------------------------------------------------------------------
October 31, 2009
---------------------------------------
Fair Value
Over (Under)
Book Value Fair Value Book Value
---------------------------------------------------------------------
Assets
Cash resources $ 297,104 $ 297,104 $ -
Securities 1,891,409 1,891,409 -
Securities purchased under
resale agreements - - -
Loans(1) 9,320,749 9,368,074 47,325
Other assets(2) 97,179 97,179 -
Derivative related 2,334 2,334 -
Liabilities
Deposits(1) 9,628,949 9,739,360 110,411
Other liabilities(3) 265,295 265,295 -
Securities sold under
repurchase agreements 300,242 300,242 -
Subordinated debentures 375,000 377,363 2,363
Derivative related 74 74 -
---------------------------------------------------------------------
(1) Loans and deposits exclude deferred premiums and deferred
revenue, which are not financial instruments.
(2) Other assets exclude land, buildings and equipment, goodwill and
other intangible assets, reinsurers' share of unpaid claims and
adjustment expenses, future income tax asset, prepaid and
deferred expenses, financing costs and other items that are not
financial instruments.
(3) Other liabilities exclude future income tax liability, deferred
revenue, unearned insurance premiums and other items that are not
financial instruments.
(4) For further information on interest rates associated with
financial assets and liabilities, including derivative
instruments, refer to Note 12.
12. Interest Rate Sensitivity
The Bank's exposure to interest rate risk as a result of a difference
or gap between the maturity or repricing behavior of interest
sensitive assets and liabilities, including derivative financial
instruments, is discussed in Note 28 of the audited consolidated
financial statements for the year ended October 31, 2009 (see page 93
of the 2009 Annual Report). The following table shows the gap
position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
($ millions) Month Months to 1 Year Year
-------------------------------------------------------------------------
July 31, 2010
Assets
Cash resources and
securities $ 88 $ 139 $ 358 $ 585
Loans 4,946 603 1,049 6,598
Other assets - - - -
Derivative financial
instruments(1) 1 43 2 46
-------------------------------------------------------------------------
Total 5,035 785 1,409 7,229
-------------------------------------------------------------------------
Liabilities and Equity
Deposits 4,075 588 2,156 6,819
Other liabilities 3 6 29 38
Debentures - - 70 70
Shareholders' equity - - - -
Derivative financial
instruments(1) 1 43 2 46
-------------------------------------------------------------------------
Total $ 4,079 $ 637 $ 2,257 $ 6,973
-------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 956 $ 148 $ (848) $ 256
-------------------------------------------------------------------------
Cumulative Gap $ 956 $ 1,104 $ 256 $ 256
-------------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 7.8% 9.0% 2.1% 2.1%
-------------------------------------------------------------------------
April 30, 2010
Cumulative gap $ 962 $ 978 $ 25 $ 25
-------------------------------------------------------------------------
Cumulative gap as a
Percentage of total
assets 7.9% 8.0% 0.2% 0.2%
-------------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 486 $ 275 $ 208 $ 208
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 4.1% 2.3% 1.8% 1.8%
-------------------------------------------------------------------------
Non-
1 Year to More than interest
($ millions) 5 Years 5 Years Sensitive Total
-------------------------------------------------------------------------
July 31, 2010
Assets
Cash resources and
securities $ 737 $ 94 $ 61 $ 1,477
Loans 3,607 103 17 10,325
Other assets - - 308 308
Derivative financial
instruments(1) 50 - - 96
-------------------------------------------------------------------------
Total 4,394 197 386 12,206
-------------------------------------------------------------------------
Liabilities and Equity
Deposits 3,349 105 (16) 10,257
Other liabilities 33 7 342 420
Debentures 170 75 - 315
Shareholders' equity - - 1,118 1,118
Derivative financial
instruments(1) 50 - - 96
-------------------------------------------------------------------------
Total $ 3,602 $ 187 $ 1,444 $ 12,206
-------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 792 $ 10 $ (1,058) $ -
-------------------------------------------------------------------------
Cumulative Gap $ 1,048 $ 1,058 $ - $ -
-------------------------------------------------------------------------
Cumulative Gap as a
percentage of total
assets 8.6% 8.7% -% -%
-------------------------------------------------------------------------
April 30, 2010
Cumulative gap $ 1,104 $ 1,119 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
Percentage of total
assets 9.0% 9.1% -% -%
-------------------------------------------------------------------------
October 31, 2009
Cumulative gap $ 1,052 $ 1,073 $ - $ -
-------------------------------------------------------------------------
Cumulative gap as a
percentage of total
assets 8.9% 9.0% -% -%
-------------------------------------------------------------------------
(1) Derivative financial instruments are included in this table at the
notional amount.
(2) Accrued interest is excluded in calculating interest sensitive assets
and liabilities.
(3) Potential prepayments of fixed rate loans and early redemption of
redeemable fixed term deposits have not been estimated. Redemptions
of fixed term deposits where depositors have this option are not
expected to be material. The majority of fixed rate loans, mortgages
and leases are either closed or carry prepayment penalties.
The effective, weighted average interest rates for each class of
financial assets and liabilities are shown below:
Floating
Rate and Total
Within 1 1 to 3 3 Months Within 1
July 31, 2010 Month Months to 1 Year Year
-------------------------------------------------------------------------
Total assets 3.8% 2.8% 4.7% 3.9%
Total liabilities 0.7 2.6 2.6 1.5
-------------------------------------------------------------------------
Interest rate
sensitive gap 3.1% 0.2% 2.1% 2.4%
-------------------------------------------------------------------------
April 30, 2010
-------------------------------------------------------------------------
Total assets 3.5% 2.8% 4.6% 3.6%
Total liabilities 0.6 1.7 2.9 1.4
-------------------------------------------------------------------------
Interest rate
sensitive gap 2.9% 1.1% 1.7% 2.2%
-------------------------------------------------------------------------
October 31, 2009
-------------------------------------------------------------------------
Total assets 3.8% 2.6% 4.5% 3.8%
Total liabilities 0.7 2.4 3.1 1.4
-------------------------------------------------------------------------
Interest rate
sensitive gap 3.1% 0.2% 1.4% 2.4%
-------------------------------------------------------------------------
1 Year to More than
July 31, 2010 5 Years 5 Years Total
------------------------------------------------------------
Total assets 5.6% 5.5% 4.5%
Total liabilities 3.2 5.8 2.1
------------------------------------------------------------
Interest rate
sensitive gap 2.4% (0.3)% 2.4%
------------------------------------------------------------
April 30, 2010
------------------------------------------------------------
Total assets 5.5% 4.3% 4.3%
Total liabilities 3.2 5.8 2.0
------------------------------------------------------------
Interest rate
sensitive gap 2.3% (1.5)% 2.3%
------------------------------------------------------------
October 31, 2009
------------------------------------------------------------
Total assets 4.9% 5.8% 4.3%
Total liabilities 3.6 5.8 2.3
------------------------------------------------------------
Interest rate
sensitive gap 1.3% -% 2.0%
------------------------------------------------------------
Based on the current interest rate gap position, it is estimated that
a one-percentage point increase in all interest rates would increase
net interest income by approximately 1.5% or $4,442 (October 31, 2009
- 2.5 % or $6,574 decrease to net interest income) and decrease other
comprehensive income $9,232 (October 31, 2009 - $21,355) net of tax,
respectively over the following twelve months. A one-percentage point
decrease in all interest rates would decrease net interest income by
approximately 1.4% or $4,331 (October 31, 2009 - 3.8% or $10,241
increase to net interest income) and increase other comprehensive
income $9,232 (October 31, 2009 - $21,355) net of tax.
13. Segmented Information
The Bank operates principally in two industry segments - banking and
trust, and insurance. These two segments differ in products and
services but are both based within Western Canada. The banking and
trust segment provides comprehensive banking services, trust and
wealth management services for individuals, businesses and
institutional clients. The insurance segment provides home and auto
insurance to individuals in British Columbia and Alberta.
Banking and Trust
--------------------------------------
Three months ended
--------------------------------------
July 31 April 30 July 31
2010 2010 2009
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 83,235 $ 78,436 $ 59,340
Less teb adjustment 2,548 2,448 2,018
-------------------------------------------------------------------------
Net interest income per financial
statements 80,687 75,988 57,322
Other income(2) 19,865 24,951 18,651
-------------------------------------------------------------------------
Total revenues 100,552 100,939 75,973
Provision for credit losses 5,806 5,487 3,369
Non-interest expenses 46,305 47,129 37,283
Provision for income taxes 5,342 13,797 9,791
Non-controlling interest in
subsidiary 59 41 50
-------------------------------------------------------------------------
Net income $ 43,040 $ 34,485 $ 25,480
-------------------------------------------------------------------------
Total average assets
($ millions)(3) $ 11,935 $ 11,688 $ 11,142
-------------------------------------------------------------------------
Insurance
--------------------------------------
Three months ended
--------------------------------------
July 31 April 30 July 31
2010 2010 2009
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 1,785 $ 1,696 $ 1,594
Less teb adjustment 234 214 171
-------------------------------------------------------------------------
Net interest income per financial
statements 1,551 1,482 1,423
Other income(2) 6,160 5,889 5,953
-------------------------------------------------------------------------
Total revenues 7,711 7,371 7,376
Provision for credit losses - - -
Non-interest expenses 2,995 2,831 2,927
Provision for income taxes 1,161 1,141 1,200
Non-controlling interest in
subsidiary - - -
-------------------------------------------------------------------------
Net income $ 3,555 $ 3,399 $ 3,249
-------------------------------------------------------------------------
Total average assets
($ millions)(3) $ 216 $ 210 $ 200
-------------------------------------------------------------------------
Total
--------------------------------------
Three months ended
--------------------------------------
July 31 April 30 July 31
2010 2010 2009
-------------------------------------------------------------------------
Net interest income (teb)(1) $ 85,020 $ 80,132 $ 60,934
Less teb adjustment 2,782 2,662 2,189
-------------------------------------------------------------------------
Net interest income per financial
statements 82,238 77,470 58,745
Other income 26,025 30,840 24,604
-------------------------------------------------------------------------
Total revenues 108,263 108,310 83,349
Provision for credit losses 5,806 5,487 3,369
Non-interest expenses 49,300 49,960 40,210
Provision for income taxes 6,503 14,938 10,991
Non-controlling interest in
subsidiary 59 41 50
-------------------------------------------------------------------------
Net income $ 46,595 $ 37,884 $ 28,729
-------------------------------------------------------------------------
Total average assets
($ millions)(3) $ 12,151 $ 11,898 $ 11,342
-------------------------------------------------------------------------
Banking and Trust Insurance Total
-----------------------------------------------------------
Nine months ended Nine months ended Nine months ended
-----------------------------------------------------------
July 31 July 31 July 31 July 31 July 31 July 31
2010 2009 2010 2009 2010 2009
-------------------------------------------------------------------------
Net interest
income
(teb)(1) $234,290 $163,840 $ 5,168 $ 4,502 $239,458 $168,342
Less teb
adjustment 7,375 4,984 632 466 8,007 5,450
-------------------------------------------------------------------------
Net interest
income per
financial
statements 226,915 158,856 4,536 4,036 231,451 162,892
Other income 65,432 56,994 17,799 12,531 83,231 69,525
-------------------------------------------------------------------------
Total revenues 292,347 215,850 22,335 16,567 314,682 232,417
Provision for
credit losses 15,006 10,107 - - 15,006 10,107
Non-interest
expenses 131,061 108,574 8,447 8,035 139,508 116,609
Provision for
income taxes 31,889 27,289 3,589 2,311 35,478 29,600
Non-controlling
interest in
subsidiary 176 173 - - 176 173
-------------------------------------------------------------------------
Net income $114,215 $ 69,707 $ 10,299 $ 6,221 $124,514 $ 75,928
-------------------------------------------------------------------------
Total average
assets ($
millions)(3) $ 11,647 $ 10,959 $ 213 $ 193 $ 11,860 $ 11,152
-------------------------------------------------------------------------
(1) Taxable Equivalent Basis (teb) - Most financial institutions analyze
revenue on a taxable equivalent basis to permit uniform measurement
and comparison of net interest income. Net interest income (as
presented in the consolidated statement of income) includes tax-
exempt income on certain securities. Since this income is not
taxable, the rate of interest or dividends received is significantly
lower than would apply to a loan or security of the same amount. The
adjustment to taxable equivalent basis increases interest income and
the provision for income taxes to what they would have been had the
tax-exempt securities been taxed at the statutory rate. The taxable
equivalent basis does not have a standardized meaning prescribed by
generally accepted accounting principles and therefore may not be
comparable to similar measures presented by other financial
institutions.
(2) Other income for the insurance segment is presented net of net
claims, adjustment expenses and policy acquisition expenses and
includes gains on sale of securities.
(3) Assets are disclosed on an average daily balance basis as this
measure is most relevant to a financial institution and is the
measure reviewed by management.
14. Capital Management
Capital for Canadian financial institutions is managed and reported
in accordance with a capital management framework specified by OSFI
commonly called Basel II.
Capital funds are managed in accordance with policies and plans that
are regularly reviewed and approved by the Board of Directors and
take into account forecasted capital needs and markets. The goal is
to maintain adequate regulatory capital to be considered well
capitalized, protect customer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all while
providing a satisfactory return for shareholders. Additional
information about the Bank's capital management practices is provided
in Note 31 to the 2009 audited financial statements beginning on page
97 of the 2009 Annual Report.
Capital Structure and Regulatory Ratios
As at As at As at
July 31 April 30 July 31
2010 2010 2009
-------------------------------------------------------------------------
Capital
Tier 1 $ 1,159,924 $ 1,128,608 $ 1,040,777
Total 1,469,915 1,434,081 1,432,170
-------------------------------------------------------------------------
Capital ratios
Tier 1 11.4 % 11.4 % 11.2 %
Total 14.4 14.5 15.4
Assets to capital multiple 8.3 x 8.4 x 8.0 x
-------------------------------------------------------------------------
During the three and nine months ended July 31, 2010, the Bank
complied with all internal and external capital requirements.
15. Business Acquisition
On February 1, 2010, the Bank acquired 100% of the outstanding
common shares of National Leasing in exchange for $52,826 in cash,
2,065,088 common shares of the Bank ($42,582) and contingent
consideration for a total acquisition cost of $126,618. Both the
Bank and the vendors have the option to trigger the payment of the
contingent consideration no earlier than November 1, 2012. The final
amount of contingent consideration is not yet determinable and any
change will be recognized as an adjustment to goodwill in the period
in which the contingency is resolved.
National Leasing is a commercial equipment leasing company for small
to mid-size transactions. National Leasing is headquartered in
Winnipeg, Manitoba, and at acquisition had over 58,000 lease
agreements with a collective book value of approximately $657,000,
including securitized assets which comprise approximately one half of
the portfolio.
Details of the fair values of assets and liabilities acquired are as
follows:
Assets and Liabilities Acquired at Fair Value
-------------------------------------------------------------------------
Loans $ 341,621
Intangible assets 40,708
Goodwill 27,937
Long-term debt (270,630)
Future income tax liabilities (10,611)
Other items, net (2,407)
-------------------------------------------------------------------------
Net assets acquired $ 126,618
-------------------------------------------------------------------------
Intangible assets include customer relationships, computer software,
non-competition agreements, lease administration contracts and
trademarks. The trademark, which has an estimated value of $1,610, is
not subject to amortization. National Leasing's financial results,
the goodwill and other intangible assets related to the acquisition
are included in the banking and trust segment. The total amount of
goodwill and intangible assets are not deductible for income tax
purposes. The long- term debt was repaid immediately after the
acquisition.
16. Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable
entities to International Financial Reporting Standards (IFRS). The
Bank's consolidated financial statements will be prepared in
accordance with IFRS for the fiscal year commencing November 1, 2011
and will include comparative information for the prior year.
The Bank has a four stage project underway to identify and evaluate
the impact of the transition to IFRS on the consolidated financial
statements and develop a plan to complete the transition. The project
plan includes the following phases - diagnostic, design and planning,
solution development, and implementation. The diagnostic, and design
and planning phases are complete, and the solution development phase
is expected to be substantially complete by the end of fiscal 2010.
The impact of the transition to IFRS on the Bank's consolidated
financial statements for current standards is not yet determinable.
CWB continues to monitor the International Accounting Standards
Board's proposed changes to standards during Canada's transition to
IFRS. These proposed changes may have a significant impact on the
Bank's implementation plan and future financial statements.
-------------------------------------------------------------------------
Shareholder Information
-------------------------------------------------------------------------
Head Office Transfer Agent and Registrar
Canadian Western Bank & Trust Valiant Trust Company
Suite 3000, Canadian Western Suite 310, 606 - 4th Street S.W.
Bank Place Calgary, AB T2P 1T1
10303 Jasper Avenue Telephone: (403) 233-2801
Edmonton, AB T5J 3X6 Fax: (403) 233-2857
Telephone: (780) 423-8888 Website: www.valianttrust.com
Fax: (780) 423-8897 E-mail: [email protected]
Website: www.cwbankgroup.com
Eligible Dividends Designation
Subsidiary Offices
CWB designates all dividends for both
Canadian Western Trust Company common and preferred shares paid to
Suite 600, 750 Cambie Street Canadian residents as "eligible
Vancouver, BC V6B 0A2 dividends", as defined in the Income
Toll-free: 1-800-663-1124 Tax Act (Canada), unless otherwise
Fax: (604) 669-6069 noted.
Website: www.cwt.ca
Dividend Reinvestment Plan
Canadian Direct Insurance
Incorporated CWB's dividend reinvestment plan
Suite 600, 750 Cambie Street allows common and preferred
Vancouver, BC V6B 0A2 shareholders to purchase
Telephone: (604) 699-3678 additional common shares by
Fax: (604) 699-3851 reinvesting their cash dividend
Website: www.canadiandirect.com without incurring brokerage and
commission fees. For information
Valiant Trust Company about participation in the plan,
Suite 310, 606 - 4th Street S.W. please contact the Transfer Agent
Calgary, AB T2P 1T1 and Registrar or visit
Toll-free: 1-866-313-1872 www.cwbankgroup.com.
Fax: (403) 233-2857
Website: www.valianttrust.com Investor Relations
Adroit Investment Management Ltd. For further financial information
Suite 1250, contact:
Canadian Western Bank Place Kirby Hill, CFA
10303 Jasper Avenue Director, Investor & Public
Edmonton, AB T5J 3N6 Relations
Telephone: (780) 429-3500 Canadian Western Bank
Fax: (780) 429-9680 Telephone: (780) 441-3770
Website: Toll-free: 1-800-836-1886
www.adroitinvestments.ca Fax: (780) 969-8326
E-mail:
National Leasing Group Inc. [email protected]
1525 Buffalo Place
Winnipeg, MB R3T 1L9 Online Investor Information
Toll-free: 1-800-665-1326
Toll-free fax: 1-866-408-0729 Additional investor information
Website: www.nationalleasing.com including supplemental financial
information and corporate
Stock Exchange Listings presentations are available on
CWB's website at www.cwbankgroup.com.
The Toronto Stock Exchange
Common Shares: CWB Quarterly Conference Call and Webcast
Series 3 Preferred Shares:
CWB.PR.A CWB's quarterly conference call and
Common Share Purchase Warrants: live audio webcast will take place
CWB.WT on September 2, 2010 at 8:00 a.m. ET.
The webcast will be archived on the
Bank's website at www.cwbankgroup.com
for sixty days. A replay of the
conference call will be available
until September 16, 2010 by dialing
(416) 849-0833 or toll free
(800) 642-1687 and entering
passcode 89346886.
For further information: Larry M. Pollock, President and Chief Executive Officer, Canadian Western Bank, Phone: (780) 423-8888; Kirby Hill, CFA, Director, Investor and Public Relations, Canadian Western Bank, Phone: (780) 441-3770, E-mail: [email protected]
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